A question I hear often from privately held business owners is “Why do I need anyone to help me sell my company? I already have buyers wanting to buy it now.” The answer is related to an imbalance in experience, information and human resources. The outcome is that owners get less if they sell their companies themselves, according to recent research by Fairfield University
Think about selling your house. This is generally the most valuable asset for any household, and the second most valuable for a privately held business owner. I have had people offer to buy my house. Thus, like the privately-held business owner, I have interested buyers. But do I believe for a moment that this is the best price I can possibly receive? If I listed the house with a real estate broker, what are the odds that one of these people would end up being the high bidder? I think the odds are low. And, how do I run the rest of my life while I prepare my house for sale and go through the very time consuming process of talking to and negotiating with buyers?
Selling a house is very, very simple compared to selling a company. You can benchmark a house based on comparable transactions, whereas no two companies are alike in any similar way. Companies have liability issues, potential litigation, customer concentration, product concentration, HR issues, succession management issues, and technology risks. The due diligence lists of sophisticated buyers is in the order of 35 pages long. Here is what one looks like: M&A checklist The buyer’s due diligence team will include their attorneys, accountants, and their lenders with their field auditors. I regularly see buyer’s due diligence costs total $350,000 for a middle-market company.
Obtaining fair market value requires (1) a professional description of the asset from the buyer’s standpoint, and (2) contacting sufficient potential buyers to assure that you have competition and statistical reliability that you have canvassed the market. Private equity firms make a living by contacting business owners and negotiating one-off deals. Strategic acquirors do the same thing and commonly want just a brand, product formulation, process, or customer base and are unwilling to pay for the infrastructure and other valuable intangibles you have created. Sell to one of these buyers and you are selling just part of your company’s value.
Private equity firms and larger strategic investors are professional buyers. They have internal or retained legal counsel specializing in mergers and acquisitions, databases of recent M&A transactions that they can use as comparables, a staff of analysts gifted in industry and economic research, and the ability to marshal internal human resources to simply force an outcome through superior effort.
Privately held business owners are most often first-time sellers. Compared to PE firms, this is a profound inequity. The business owner has a full-time job running their company. The sale process is very time consuming. Putting together the historical financial information, formation papers, customer and supplier information, historical data on sales by SKU by customer, information on tangible assets… the due diligence list goes on ad nauseum at times. Do this by yourself and prepare to be overwhelmed.
The business owner will be holding down two jobs: running their company and selling their company. Business owners are fully-employed just running their company. The buyer has the advantage of superior knowledge, superior human resources, and the ability to wear down the seller over time. The buyer will request what seems like a never-ending stream of information, and will emphasize and drill-down into the ever-present weaknesses of the company as a detriment to value. In time, the buyer will fatigue the seller. The seller would like to cancel the transaction, but is now too tired to start the sale process all over again. The buyer generally wins this battle.
There are numerous ways for a privately held business owner to get less than they deserve. A few include a lack of competition in the bidding process, liabilities which must be assumed by the seller, assets which are not included in the sale (both tangible and intangible, i.e. intellectual capital), tax liabilities, potential future liabilities, post-closing working capital adjustments, and the list goes on.
An M&A professional will protect the seller from being distracted from day-to-day management and becoming fatigued. The investment banker will assist in organizing due diligence materials ahead of time, and ensure that enough potential buyers are contacted to assure that the odds are low of any higher prices being unidentified. The investment banker will protect the seller from obscure but potentially deleterious provisions in the purchase and sale agreement including post-closing items. The investment banker will protect the seller from obscure but potentially deleterious provisions in the purchase and sale agreement including post-closing items.
The challenge is that we don’t know what we don’t know. To counter that, talk to business owners that have sold their company. Chat with an experienced M&A attorney both for advice and referrals to business owners who have sold. Learn as much about the process and what to expect as you can. Then decide for yourself.
By Charles Smith
Charles Smith is the founder and Managing Partner of Pegasus Intellectual Capital Solutions, a Chicago based boutique investment bank engaged in mergers and acquisitions, capital raising, and restructuring and workouts. PegasusICS is the creator of the Intellectual Capital AuditTM, a methodology to identify how knowledge is used within a company how it creates wealth, and how it affects corporate governance. The firm was voted 2013 Boutique Investment Bank of the Year by Acquisition Finance Magazine. You can learn more by clicking here.