InSight

Exit and Growth Strategies for Middle Market Businesses

What are the Five Deal Killers to Selling Your Business?

By John Hammett | May 24, 2011

DOES YOUR COMPANY HAVE ONE OR MORE OF THESE POTENTIALLY FATAL ISSUES TO SELLING A COMPANY?

As we enter the second half of 2011, many companies’ sales and earnings are recovering.  For the first time since 2008, owners are seriously thinking of selling.

This is a good time, too, for private company owners to be selling.  Public companies (strategic buyers) have over $1,800 billion of cash sitting on their balance sheets and private equity funds (financial buyers) have over $500 billion in cash they need to invest.  In addition, banks have some $900 billion in excess cash to help both types of buyers to finance those acquisitions.

Owners who are preparing to sell need to be careful of what we call the five Deal Killers.  These are company attributes that can stop buyers cold when they look at a deal.  Deal Killers are not always fatal if company owners recognize them and take action ahead of time to reduce their effect.

 THE FIVE DEAL KILLERS

  • NO MANAGEMENT DEPTH
  • CUSTOMER CONCENTRATION
  • INCONSISTENT FINANCIAL HISTORY
  • ENVIRONMENTAL ISSUES
  • ORGANIZED LABOR

 ANTIDOTES TO DEAL KILLERS

Although deal killers are serious issues for owners, there are some antidotes that Corporate Finance Associates has developed to mitigate their impact.  Here is what we recommend: 

NO MANAGEMENT DEPTH.  The best solution is to hire a #2 executive as soon as possible, with the expectation that he will succeed the seller after the sale.   The increase in value when the company is sold will far exceed the cost of additional salary for this person. Owners should also begin immediately to transfer customer relationships to the sales leader and they should transfer operating knowledge to the inside management team so that others in the organization provide continuity when the owner retires. 

CUSTOMER CONCENTRATION.  Start now to focus your business development efforts toward bringing in business from new customers.  When you begin the process of selling the company, search hard to find a buyer who puts a high value on your big customer.  Some buyers will want to buy your company simply to acquire a strong business relationship with that customer.

INCONSISTENT FINANCIAL HISTORY.  Buyers look back three or four years to get a sense of prior results.  If yours has ups and downs, consider changing the time frame of history by going back more years, if this makes history look more stable.  You can compare your financial results with industry trends, if this makes you look more consistent than your competitors.  We also recommend that you hire an accounting consultant to re-state history by removing one-time large orders from the results or removing large non-recurring expenses to smooth the historical picture.

ENVIRONMENTAL ISSUES.  Environmental issues are most deadly if they come up unexpectedly, or late in the process.  Reduce your risk by identifying known environmental issues and preparing a solution with cost estimates.  Disclose the issue, and your solutions, to buyers early.

COLLECTIVELY-BARGAINED LABOR.  If your company is one of the 7% of private companies with a union, this will be a problem.  Focus on buyers who are already unionized.  The will have experience and your deal will not have a negative effect on their overall business.

Posted by John Hammett.


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