Sellers are just like everyone else in that they can make mistakes. In this article, we’ll explore some of the most common mistakes that we see along with some of the repercussions.
1. Not Seeing the Buyer’s Point of View
The first major mistake that sellers make is that they simply fail to look at the situation from the buyer’s perspective. One of the smartest moves any seller can make is to step back and ask themselves two key questions.
“What information would I expect to see if I was thinking about buying this business?
“Would I trust the information being presented to me if I was the buyer?”
While there are many other questions sellers can ask to help reframe their thinking, these two simple questions can orient a seller’s thinking towards a buyer’s perspective. Additionally, investing the time to understand the buyer’s position can help avoid a range of problems and help smooth out the negotiation process.
2. Neglecting the Business During the Sales Process
Another seller mistake we see is that the seller neglects the business during the sales process. This can have significant negative long-term consequences. Sellers must understand that they must maintain the day-to-day operations as though the business is still theirs. The old saying, “Don’t count your chickens before they’ve hatched,” most definitely applies to selling any business. Business deals fall apart all the time. This is true from small deals to corporate acquisitions.
3. Overall Lack of Preparation
Any seller who is truly serious about selling his or her business will have all of their documentation available and well organized. This list would include financial records, environmental studies, business forecasts and more. It is important to make a good impression and convey to prospective buyers that a business is well organized and ready to be sold. Disorganization on any level could make prospective buyers worry that the business isn’t being operated in a professional manner.
4. Holding Misconceptions Around a Business’ Value
Finally, a real “deal killer” can be when sellers don’t understand (or have a mental block) concerning the real value of their business. This issue can lead many business owners to set a price that is simply too high or even completely unrealistic. Many sellers have put years of blood, sweat and tears into a business. Learning that their business isn’t as valuable as they had hoped can be an emotional, psychological and financial blow all in one. But sellers also have to adjust to the realities of what the market will bear.
Avoiding seller pitfalls is incredibly important. Working with a skilled and proven business broker or M&A advisor is a way for buyers and sellers alike to avoid an array of significant problems that could otherwise arise.
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Selling a business isn’t always 100% about the price. It is not like selling a house where typically the most important factor is who places the highest offer. In the end, if the seller is to achieve the most optimal results, there are other variables that should be considered.
The idea of selling to a competitor is one that seems attractive to many business owners. After all, a competitor has the built-in advantage of understanding the business and thus can theoretically understand the value of the business better than an outsider. But while this point is quite valid, selling to a competitor comes with its own problems. Selling means disclosing a great deal of confidential information, and that could prove to be very risky if the deal were to fall apart.
A second avenue that sellers will often explore is selling to a financial buyer. A financial buyer is likely not to be a competitor. But on the downside, a financial buyer may be unwilling to pay the seller’s price. It is important to remember that a financial buyer is considering buying the business with the intention of selling it for a profit within a few years.
The highest selling price may come from a strategic acquirer. But this doesn’t necessarily mean selling to a strategic acquirer is the most prudent course of action for a seller. A strategic acquirer may not have the best interests of the company at heart. When a strategic acquirer takes ownership, key employees and management may be replaced. The company may even be moved. Many owners are unprepared for the shock that may come along with a strategic acquisition.
There are other potential buyers, many of whom are frequently overlooked, who may be the optimal fit for a given business. It is possible that the best buyer for a company could be one of its employees. However, this option comes with risks as well. Key employees and management may leave if the deal falls through, as they now know that the company is for sale.
Finding overlooked buyers is what business brokers do best. Matching the right buyer with the right business is both a science and an art. Teaming with the right business broker or M&A advisor can open up a range of new avenues and help a seller reach the kind of buyer that is as close as possible to the perfect fit.
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It is safe to state that Howard Brownstein, President of The Brownstein Corporation, is a true expert in providing turnaround management and advisory services to companies, as well as their stakeholders. Brownstein serves as an independent corporate board member for both publicly held as well as privately-owned companies and nonprofits. During his career, he has been named a Board Leadership Fellow by the National Association of Corporate Directors (NACD) and served as Board Chair and President of its Philadelphia Chapter. He also serves as Vice Chair of the ABA Corporate Governance Committee and has been named a Fellow of the American Bar Foundation. He has been a speaker at many of the world’s top universities including Harvard Business School and Wharton. Brownstein received his J.D. and M.B.A. degrees from the University of Pennsylvania.
Mr. Brownstein is considered to be one of the world’s top experts in distressed businesses. He believes it is essential to remember that not all distressed businesses are, in fact, the same. There is simply no way to know how bad things are for a given distressed business until one begins to “look under the hood,” and get a full view of what problems may lurk underneath.
Brownstein firmly believes that distressed businesses can represent a real and often overlooked opportunity for buyers. The recent economic downturn brought about by COVID-19 means that there will likely be a great deal more distressed businesses on the market in the coming months or even in the next couple of years.
Why is a Given Business Distressed?
Before you consider purchasing a distressed business, you absolutely must understand the core reasons for the distresses. Without a proper and detailed understanding of why the business entered a state of distress in the first place, it is impossible to clearly articulate why the business will potentially be valuable in the future. It is essential to be able to convey “what went wrong” and how the problems can be fixed.
Brownstein points out that while there are many reasons for a business to enter distress, two symptoms top the list. The first is cash flow issues and the second issue relates to management. Often it turns out that the management was simply not rigorous enough. He also notes that companies will tend to gravitate to external issues as a way to explain away their failure.
Of course, no two distressed businesses are failing from 100% identical causes. Brownstein suggests a series of questions that you need to ask when you begin exploring a distressed business.
- What is the business’ potential value?
- Is there something of value under the problems?
- Under better or different circumstances, could the business be viable?
These are all questions that your business broker or M&A advisor can assist with. It’s important to gain a clear understanding of the business’ past, present and future.
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Keeping a product or service around that isn’t pulling its weight might prove to not be a very good idea. You may have invested a good deal of time and resources into its development, but if that product or service is no longer contributing to your bottom line, it might be time to cut it loose. Even if your product is pulling its weight, but doesn’t fit into your overall core business, then you should still consider getting rid of this “orphaned product.” Let’s take a look at some of the reasons you might want to keep or remove, an orphan product from your company.
There are four main reasons why a company might want to divest itself of a product line or service completely:
- An orphaned product line can be a distraction that takes away from core business operations.
- Funds allocated to an orphaned product could be used instead to build the core business or make improvements that are not in the current budget.
- Another good reason to remove an orphaned product from your lineup is that while it could ultimately be profitable with increased resources, the funds would be better allocated elsewhere.
- Your orphaned product could be profitable. Some buyers, companies and private equity groups are looking for product lines they can use to augment their existing ones. In fact, some buyers may even want to build a new business around a given product line.
Of course, it isn’t always as simple as “pulling the plug” and moving on. It is important to step back and consider the negative impacts of jettisoning an orphaned product, such as the fact that the product line could have key employees attached to it. Or there could be company culture issues related to removing the product, such as causing disruption within your company. You must also consider if the orphaned product could ultimately play a role in the sale of your company.
At the end of the day, an acquiring company may feel that the orphaned product line is a great fit for their existing distribution chain. Additionally, your offering might fit into a new product line that the acquiring company has launched. It is important that you evaluate every aspect of an orphaned product before making the decision to remove it from your company.
Understanding the needs and goals of your most likely buyers should play a role in your decision making. Working with an experienced business broker is an easy way to increase your chances of making the right decision.
An old saying in negotiating the sale of a business goes like this: The buyer says to the seller, “You name the price, and I get to name the terms.”
Another saying used to explain the actual value of the term full price: “If we could find you a business that nets you $250,000 a year after debt service, and you could buy it for $100 down, would you really care what the full price was?”
It seems that everyone is concerned only about full price. And yet, full price is just part of the equation. If a seller is willing to accept a relatively small down payment and carry the balance, a higher full price can be achieved. On the other hand, the more cash the seller wants up front, the lower the full price. If the seller demands all cash, barring some form of outside financing, full price lowers – and, in most cases, the chance of selling decreases as well. Even in cases where outside financing is used, such as through SBA, etc., the lender will do everything possible to ensure that the price makes sense.
Sellers should understand that both what they hope to accomplish in the sale of their business and the structure of the actual sale can dramatically influence the asking price. Price is obviously important, but other factors may be even more important. For example, consider a seller with health issues who needs to sell as quickly as possible. In his case, timing becomes more essential than price. Another seller may place more importance on her business remaining in the community. In her case, finding a buyer who will not move the business may supersede price or certainly influence it.
Likewise, the structure of the deal can both influence price and be a more significant factor than price to either the buyer or the seller. The structure can dictate how much cash the seller receives up front, which may be more important than price for some sellers. On the other hand, sellers should also be aware how much the interest on their carry-back can add up to. If cash is not an immediate concern, monthly payments with an above-average interest rate may be enticing.
These examples all demonstrate the importance of the business broker professional sitting down with the seller prior to recommending a go-to-market price. During this meeting, the broker should find out what is really important to the seller, as these issues may have a direct bearing on the price.
Sellers should look at the following factors and rank them according to importance on a scale of one to five, with five being extremely important.
• Buyer Qualifications
• Full Price
• Amount of Cash Involved
• Commission/Selling Fees
• Closing Costs
• Exclusive Listing
• How the Business is Shown
• How a New Owner Continues the Business
By ranking these items and discussing them with a professional Business Broker, a seller can receive helpful advice from the broker on price, terms, and structuring the sale.
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