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When selling a company there are many steps to go over before the process is complete. An M&A intermediary is extremely beneficial in the sale. Often times, small companies overlook the importance of an M&A intermediary and try to sell the business on their own. This can lead to small details that turn into big mistakes.
This article goes into depth on just a few of the common mistakes that companies make when selling a business on their own, as told by Attorney Caroline Nicolai.
Not Being Prepared
Selling a business can often take anywhere from six to 12 months to complete. The process is time consuming and involves a great deal of steps. Some businesses can get caught up in one bidder that appears to have a quality deal but boxes the company in with a demand for exclusivity. To avoid this, it is best to prepare for a sale by setting up an auction or competitive bidding process.
Without an M&A intermediary, the selling company will need to provide their own nondisclosure agreement (NDA) and online data room during negotiations. In simple terms, an NDA protects the seller and the company’s secrets, while the data room contains all of the key information a bidder will need to review (contracts, employee information, invoices, etc.) A well-drafted NDA and completed data room takes copious amounts of time to put together but allows the entire selling process to move more smoothly and efficiently. Incomplete books, records or contracts can create unnecessary risks for the seller and its stockholders.
Hiring & Negotiating
During the selling process, hiring a lawyer that can handle mergers and acquisitions is the best way to prevent unwanted issues. Also needed during the process is a good financial advisor or investment banker. For this role, the best advisor has strong relationships with likely buyers and can get their attention. Negotiating is a huge part in the sale of a business where both sides are looking to receive maximum benefits. Having an experienced M&A negotiator can speed up the process and ensure that both sides receive most of what they’re realistically expecting.
Hiring the right advisor or investment banker starts with negotiating their terms in an engagement letter, to make certain that they are not taking advantage of the company and looking for a large payout. One of the biggest mistakes sellers make is not negotiating the key deal terms in a letter of intent or the acquisition agreement, which in turn leaves all of the power in the buyer’s hands. A smart seller for instance, negotiates the engagement letter through price, how the sale will be paid, the length of exclusivity, and amount and length of escrow. The acquisition agreement is just as important, as it directly relates to how important the seller is to the future of the buyer’s business.
During closing, negotiating earn-out provisions are a priority, in hopes of an additional payment for the selling business and/or stockholders. Earn-out provisions can bridge a valuation gap and are only as good as how well the provision is drafted and negotiated. Otherwise, the provision can lead to litigation if not handled correctly.
Completing the Sale
This is when a disclosure schedule is absolutely necessary. If a disclosure schedule is not completed in time or poorly put together it can create unnecessary risk for the seller and its stockholders. A disclosure schedule contains important information such as outstanding key contracts, intellectual property, related party transactions, employee information, pending litigation, insurance, and much more.
During the entire process of selling a business, it is important to stay on track of managing and keeping operations running smoothly. The business’s success is a large factor in the sale and a slip up could potentially end a deal. Communication and not understanding what a good strategic fit is for the business is a mistake that sellers commonly make. Showing and telling potential buyers about the company vision will allow things to sort out on their own and show if a buyer is a match for the company.
Lastly, sellers cannot forget about their employees. In every sale, employees will have questions and deserve to know what the company will be like in the hands of a new owner. Keeping an honest and open conversation between employees creates a smooth, simple transition. After all, they keep the company running and will (hopefully) continue to do so when the seller has completed the sale.
At George & Company we’ve seen and made a lot of businesses sell. If you’re interested in buying or selling a business, or getting the assistance you need to make that happen, please contact us and we’ll put our skills in M&A, brokerage, appraising and financing to work for you.