10 major deal breakers and how to avoid them
Selling a business is a fraught process. Find out how to avoid the mistakes that can torpedo a deal.
Once in a blue moon a business is bought and sold in a smooth process that doesn’t feature hiccups or setbacks. But this is far from the norm for selling a business; even the most mutually beneficial deals happen upon bumps in the road.
The trick, as a vendor, is to anticipate problems before they arise and banish them well in advance of putting up your business for sale. Throw open your doors without taking care of these details and you could waste time and money – not to mention potential buyers.
But what are the common deal breakers that can collapse your sale? Read on for our list of the biggest, and how to eradicate them.
Don’t attract a single buyer
Having multiple parties interested in your business lends you power in the negotiation. Buyers who know they could lose a deal to a competitor are more attentive than those in the comfortable position of knowing that if the deal falls down, it’s no biggie.
“Perhaps the single factor most likely to influence the sale price is to have more than one potential buyer,” says Fiona Czerniawska, founder of Source for Consulting and author of Buying Professional Services. “The key, therefore, is to understand what value the buyers will derive from the acquisition.”
Don’t make the tangible intangible
Question: would you rather buy a fast food chain or the marketing agency that promotes it? Britain is a service-based economy, but people like to buy things they can touch and see. A consultancy, therefore, is only as valuable as the clients it represents.
So it’s a good idea to shoehorn as much real world or quantifiable value into your business as possible. An obvious area is revenue, both present and (demonstrably) in future; but intellectual property and brand value are important too. You need to turn your services into products.
“Build up your intellectual property relating to your products, services and just as importantly processes. If you can patent them you will build in even more value,” says Mike Altendorf, who sold his IT consulting firm to EMC for a reported £42m in 2008.
He adds: “Build up your brand by promoting what you do; the technology industry is littered with businesses that had a great product but were outclassed in their marketing.”
Don’t obsess about selling
“Never set up a business because you want to sell it, set up a business to be successful. The things that make a business successful are the same things that also make it saleable,” says Altendorf.
Build a great business and you will have built one that’s attractive to buyers. Entrepreneurs who focus on the exit risk overlooking the fundamental importance of a business plan with longevity, and in doing so allow gaps to appear in the sales story.
Jos White, co-founder of three businesses including the software security firm MessageLabs which sold to Symantec for $700m in 2008, argues that selling should be the last thing on your mind – even when you’re selling.
He says: “It’s amazing how many businesses don’t have that clear, defined purpose. It needs to go beyond targets and numbers and be something more meaningful, more tangible. Ignore any thoughts about selling.”
Don’t be opaque
That problematic area of your business – be it in your accounting, customer base or banking relationship – cannot be hidden. Not only will due diligence uncover flaws in your business, it will write them up in screaming capital letters.
“Sellers may wish to consider carrying out their own due diligence exercise with their advisors prior to putting the business on the market so that any loose ends can be identified and tidied up,” suggests Paul Simpson, a corporate lawyer with Browne Jacobson.
“Buyers want to have a full understanding of the structure, management, employees, property and trading arrangements of the target business.”
Daniel Domberger, director of Livingstone Partners, agrees: “Trying to hide it is almost always counterproductive. If a purchaser finds the issue, say during due diligence, the response will be much more dramatic. It may also have a big impact on the purchaser’s confidence in you and in everything else you’ve told them.”
Don’t pump up the value
“There’s a popular misconception that banging the table and losing your temper will get you a better deal, but it’s more likely to result in no deal at all,” says Domberger.
His analysis chimes with that of Simon Clark, managing partner of VC Fidelity Growth Partners Europe: “The most common mistakes are being unrealistic about the value of your company and being difficult about minor things.”
Don’t make enemies
“At the end of the day,” says Czerniawska, “deals are still done between people and they can fall through because the two sides don’t see eye to eye.”
Don’t leave loose ends untied
The worst cases of deal break-down happen when good businesses fail to tie up all the loose ends regarding bank accounts, suppliers, customers, staff, accounting, even admin. A buyer is most likely to sign a cheque when they have complete peace of mind – so give it to them.
“A buyer will be looking for areas of risk during due diligence and issues can impact price. Get contracts signed, get accounts audited and collect overdue debts, says Graeme Smith, partner at corporate advisory firm Zolfo Cooper.
Don’t be indispensable
“Make yourself redundant,” suggests Smith. “A buyer should be buying your business and not you. You need to demonstrate that the business can flourish without you so that you can exit.”
Jason Woodford, founder of SiteVisibility who has bought and sold business assets in numerous deals, offers a real-world example of why this is important: “A few years ago we were looking into the possibility of buying an SEO agency.
“In this case none of the revenue was contracted and it appeared to be tied to the goodwill of the principal, who did not want to be part of the going concern. In the end there was no business to purchase.”
Don’t complicate your tax
Your accountant might think he’s being clever, but complex tax structures are a turn-off when it comes to buyers. If you have a sale in mind it’s best to forgo tax avoidance for the sake of clarity.
“Unfortunately, some owner-managers’ tax planning is so complicated that it’s difficult to unwind in the context of a sale, or crystallises far greater tax liabilities than expected,” says Daniel Domberger.
“Basic tax planning is sensible and recommended – using EIS relief, EMI share options, and making sure you benefit from Entrepreneurs’ Relief – but structures which are too exotic can deter purchasers or make a deal impossible to complete.”
Don’t rely on a customer
Learn from James Phipps, chief executive of IT group Excalibur Communications: “We recently looked at a business that had good profitability and growth. However when we got into the detail we discovered that 60 per cent of its sales were from just one client, which had less than 12 months left on the contract.
“The rest of the client base had no guarantee of repeat business. The reality was they were unlikely to get a renewal on the big contract and were trying to get the value before it dived. Needless to say, it turned out to not be an attractive prospect.”