5 Reasons to Not Sell NOW
Yes, it’s true. With an abundance of capital available both in private equity funds and on corporate balance sheets, lenders eager to lend money in a high rate environment combined with a dearth of quality assets on the market, sellers of good companies are STILL commanding hard-to-believe valuation multiples in today’s M&A market. But what makes a “good” company? Beauty is often in the eye of the beholder, but there are certain fundamental characteristics that make a company attractive enough to entice a buyer to invest significant time and resources to pursue a transaction. The sale process is risky, distracting, often contentious, and due diligence scrutiny is greater than ever. So, unless a seller has adequately addressed each of the following, then the company is not likely to garner the same “multiple” as the guy at the country club… if a closing occurs at all.
1) Seller is Unclear About What’s Next
Playing golf or traveling is not enough. Leisure time may sound appealing while in the weeds of running the business, but the allure of these activities typically lasts about six months before boredom and restlessness set in. Given the rigorous nature of negotiations, if entrepreneurs lack a crystal clear vision of what they are going to do with their time when they are no longer running their company, they are more likely to walk from the deal when the going gets tough.
2) Financials Have Not Been Tested
In nearly 30 years of advising owners of companies in a transaction, I do not recall one instance when the owner thought their financial statements were inaccurate. Even if the financials are audited or reviewed, a quality of earnings assessment is inexpensive relative to the impact to purchase price that could result from not knowing what a buyer will ultimately uncover. Quality of earnings assessments are customary in today’s market and it is only in the rarest cases that this report does not yield some issue with earnings, even in audited financials, that will raise the discussion of purchase price. And these discussions are never about the buyer wanting to pay more!
3) Unsustainable Post-COVID Growth
The company struggled during COVID, but since then performance has rebounded nicely, maybe even to record levels. But to what is the rebound attributed? Are unit sales higher, or have price increases alone driven revenue growth? Has pent up demand temporarily boosted sales that will level out in the near term? These are questions that are commonly asked by buyers in the post-COVID era. Before going to market, knowing the answers to these questions and being able to convince a prospective buyer that the current growth rate is sustainable will be key to achieving the valuation one might expect from a high growth business.
4) Seller is Critical to the Business
Often, entrepreneurs decide to sell when they are tired of dealing with employees, customers, regulatory authorities and everything else that takes the fun out of running a business for them. They decide they are ready to cash in and move on to the next project, assuming they know what that is (see point #1 above)… but wait! The very seller who wants out of the business happens to have the technical knowledge or expertise that is critical to the success of the company. Or maybe they are the reason the key customers do business with them. Unless a convincing case can be made that there is nominal risk to business continuity if the entrepreneur were to get hit by the proverbial bus, then there is no buyer in his or her right mind that will close a transaction that does not require some of the entrepreneur’s skin staying in the game! This is often in the form of rolled equity or some financing mechanism, which, in either case, may require the seller to remain with the business for an extended period of time.
5) No Pre-Transaction Diligence
It is always better to uncover first what the buyer will uncover later. Most sellers, particularly if they have not been through a sale process, do not appreciate the significant value of investing in pre-transaction legal, tax, insurance and other due diligence. Paying professionals to review legal documents, complete a lien search, ensure employment and sales tax liabilities are current, and insurance coverage is sufficient, prior to going to market, could save significant dollars down the road and will exponentially increase the certainty of closing a sale transaction. Whether tying up loose ends in contracts or verifying good standing status for business licenses, nobody likes surprises during due diligence… especially when they are easily avoidable.
Yes, the M&A markets are still robust. Yes, it is a great time to be a seller. If maximum value and certainty of close are important, however, then these five factors should be addressed before going to market. If the boxes have been checked, then sellers should go forth with confidence in a successful outcome!
