Drawn out delays in off-loading a business, deliberate or not, can erode not only the value of the business, but the nerves of the seller. By TOM McKASKILL
By Tom McKaskill
Drawn out delays in off-loading a business, deliberate or not, can erode not only the value of the business, but the nerves of the seller.
I know of many entrepreneurs who have lost value on the sale of their business when the buyer has strung them out through the negotiation and due diligence process. The disruption to the business because of due diligence activities, and the distraction of focus caused by the tension in negotiations, often leads to a fall in revenue and a lowering of profits.
Where the sale price is based on a multiple of earnings, this downturn can seriously hurt the final sale price. Only by recognising this impact, whether deliberate on the part of the buyer or not, can the entrepreneur mitigate the damage.
Not all buyers are honest and scrupulous, and not all are well prepared for the buying process. Thus it is not uncommon for the sale process to be drawn out with a subsequent loss of focus on the business. This rarely works to the advantage of the seller. In fact, it is not unknown for potential buyers to use such tactics to wear down the vendor in order to get the firm at a lower price.
While some delays are unavoidable and tension and distraction are a normal part of the process, the smart entrepreneur prepares in advance for this eventuality.
There is no question that it is hard to go through the sale process without significantly using up senior executive time as there will be some elements of the negotiation and due diligence process that simply cannot be delegated.
Knowing this in advance, however, the vendor should put in place a succession plan so that essential operations can be undertaken by other than the senior management team.
Preparation for due diligence is an obvious step in selling a business. The last thing you want to be doing is hunting through storage cabinets looking for old documents or compiling essential employment or financial data, which is standard in a due diligence checklist. The vast bulk of due diligence information can be assembled in advance and kept up-to-date for when a deal is on the table. While the buyer is busy doing the analysis, you can be back running your business.
By far the best way, however, to keep a deal in play and progressing is to ensure that you have multiple potential buyers. If you are well prepared, have good advisers and have done your homework to identify those potential buyers who would have the most to gain through an acquisition, you have much greater control over the timeline of a sale process. Those buyers who are not prepared themselves or not willing to meet the deadlines will simply drop out of the process, but you do need to have a number of potential buyers to play that hand.
If you can clearly see that a buyer is deliberately using delaying tactics to wear you down and reduce the price, you are almost certainly going to be better off by pulling out of the negotiation. That tactic alone may well bring them up to the mark.
The greatest danger in any sale process is to be in a position where you have to sell, you are unprepared and you have only one potential buyer. Planning the sale well in advance, being prepared and having several potential buyers is the only way that you can really ensure you get the maximum value on sale.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.
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