By Carolyn Heinze
Rare is the business that is sold on a whim. For a good number of entrepreneurs, deciding to move on is something that takes years to put into practice. And, just as arriving at a final decision is an oftentimes lengthy process, so, too, is the exercise of selling itself: if you’re going to get the most out of the blood, sweat and tears you put into building your company, you will also put a lot of blood, sweat and tears into preparing it for a sale.
Chak Reddy is merger and acquisitions advisor at Elite Mergers & Acquisitions, Inc., a Folsom, California-based firm that specializes in selling and recapitalizing companies with revenues between $1 million and $100 million. He recently shared some advice on what’s involved in a business sale…and what pitfalls to avoid.
How “ship-shape” should a company be before going up for sale?
CR: The answer depends on how the company is being sold and what it is being sold for.
If you are a young company, and if you have grown extremely rapidly and you are looking for growth capital, or a bigger brother to come and acquire you, a lot of things can be forgotten. Companies in that particular phase of growth do not have certain things taken care of. Buyers are buying them for the growth, they are buying them for the interest they have in growing the business.
But if it is a mature company that is relatively solid and has been relatively flat, or growing moderately to keep up with the times, in this case, you need to pretty much have everything buttoned up. You’re not really offering people the prospect of growth or anything else; most probably, what you’re offering is a solid business with some probability of some customer penetration. In that situation, you will see everything buttoned down because an acquirer cannot come in and expect that there would be non-functioning parts of the business.
However, at the same time, we have buyers who are looking to buy companies that lack vision. Somebody may think, “These guys are really good, except that their operational strategies could be significantly better, and we can come in and improve that.” From a buyer’s perspective, that could be the reason that they are buying the company. But from a seller’s perspective, that is not good because if they had done that in the first place, probably the company would be worth more. So for a stable company, everything needs to be buttoned down to get the best valuation.
What are some of the mistakes that companies make in trying to increase business value in preparation for a sale?
CR. Some mistakes tend to be operational in nature. Somebody may start cutting expenses to make the numbers look good. They may find out that as the deal takes time, that comes back to bite them because those expenses that they did not invest have either impacted their growth, or caused some operational issues. Those things get discovered over the course of the deal, much to the seller’s chagrin. Belt-tightening to prepare a company for a sale is good, but trying to outsmart the other party by cutting out the basics is ill-advised.
What happens if the company has hidden a dirty little secret about itself in order to push the sale through? What recourse does the buyer have? Can they give the company back?
CR: Typically, the buyer giving the company back is not a concept that happens much. What is more likely, far more likely, is that there would be a lawsuit, and there would be a settlement. The deal being rescinded is something that is extremely rare. But the damages and other things can be very substantial. We have had some situations where people have had to give back a lot of money because it was clear that there was something that was supposed to be disclosed that wasn’t.
Carolyn Heinze is a freelance writer/editor.
Elite Mergers & Acquisitions, Inc.tED