Common Sell-Side M&A Mistakes

Successfully selling your business is about more than just building something worthwhile. The way you approach the sale, as well as the preparation you undertake in the years leading up to the sale, can greatly affect the terms of the sale, as well as the final sale price. Consider these common sell-side M&A mistakes.

Not Hiring an Advisor

An M&A advisor offers significant value, including by doing the following:

• Structuring the sales process.
• Creating an executive summary and confidential information memorandum.
• Listing and contacting potential buyers.
• Scheduling meetings with prospective buyers.
• Coordinating NDAs and structuring the sales process to protect confidentiality.
• Preparing the team for presentations to buyers.
• Advising on the valuation process.
• Supporting the negotiation process.

Asking an advisor to give you a list of likely buyers with details about their relationship with those buyers is a great way to screen advisors before making a decision. Consider also the importance of negotiating the terms of the agreement with your advisor. These contracts are almost always negotiable.

A Poor Understanding of Competitors and Comparables

Many sellers misunderstand which businesses are comparable to their own, leading to inflated expectations. The buyer will want to know what sets your business apart and from where its value springs. Sellers need to understand which companies are truly comparable, as well as how those companies are being valued. Competitors that sell for multiples of 10 times EBITDA (Earnings before interest, tax, depreciation, and amortization) point to a similar valuation process. So if you demand a more competitive price, you must have a compelling reason for doing so—and documentation to support that justification.

Incomplete Records

Don’t force buyers to blindly trust you. Well-tended books and clear financial records inspire trust and support your story about your business. Some of the most common record-keeping issues include:

• Amended contracts that have not been signed, or contracts that have not been signed by both parties.
• Unsigned or missing resolutions, stockholder minutes, or board minutes.
• Missing or unsigned employee documents.
• Missing or unsigned IP agreements or assignments.

In some cases, these deficiencies can substantially affect the value of your business. For instance, if one of your selling points is your IP but your IP contracts are weak or absent, you can expect a downgrade in valuation.

Not Using a Letter of Intent to Pre-Negotiate Key Deal Terms

Your LOI, or letter of intent, is an opportunity to negotiate key terms before a sale—and to screen out potentially unserious buyers. You have the most bargaining power prior to negotiating this key document. So get professional advice, and don’t back down from negotiating key terms. Some important considerations to address include:

• The price bracket, and how the price will be paid.
• How price adjustments will be calculated.
• The length and scope of any exclusivity period.
• The length and amount of escrow.
• Any other key terms.

Failing to Negotiate an Acquisition Agreement

Most sellers have never sold a business before. Many sell to highly experienced buyers. So they defer to the buyer’s agreement. This is a mistake. You must negotiate a favorable acquisition agreement. Keep in mind that the terms of this agreement can ultimately affect factors such as how much cash you get and whether you continue to have any liability for the business.Seek professional advice from an attorney or M&A advisor as you negotiate this agreement. Pay close attention to the period of liability, the amount of escrow holdback, closing conditions, price adjustments, and triggers for earnouts.

About Kratos Capital

Trying to manage a transaction on your own is a fool’s errand. The expertise of an advisory firm can help you better understand the other side’s motivation, and then challenge this knowledge into the best possible deal. As you navigate the process, partner with an M&A advisory team, like Kratos Capital, that boasts expertise in your industry.