It can sometimes be difficult to identify threats to the sale of your client’s business until your client is already well within the sale process, and by then it’s already too late to address them. There are many occurrences where business owners and their advisors never even see the potential Deal Killers lurking in the corner.
With this blog, it is our goal to educate you, as your client’s most trusted advisor, to be aware of the risks involved when going to market and know how to overcome the three most common Deal Killers. All advisors should have a wealth of knowledge on this topic, not just M&A professionals. It’s part of your responsibility to guide your clients and determine if an offer is right and also be able to identify the risks.
What is a Deal Killer?
A Deal Killer is a condition that, if undetected and unresolved before a third-party sale, will kill the transaction. The goal of pre-sale planning is to maximize sale profits, achieve the owner's “softer” goals, and neutralize these Deal Killers.
There are a number of Deal Killers that, once the sale process begins, live up to their name: They can and will destroy a deal. Let’s start with the most common, and avoidable, Deal Killers. You'll notice that they all have something in common – false assumptions about how much they need from their business and how much they can get from the sale.
Deal Killer #1 – Inaccurate Financial Requirements
The first, and most avoidable, pitfall is when an owner believes that they can sell their business for enough money today to satisfy their financial independence needs and wants before going to market.
There are two parts to this Deal Killer:
- The failure to appreciate how much money your client needs to support their post-exit life for as long as that life is likely to last.
- The failure to base an assessment of their company’s value on a professional estimate rather than on assumptions.
To neutralize this Deal Killer, you first need to sit down with your client and figure out exactly what they need to achieve financial security. You may have already done this with your client while working together to determine their goals. Then, hire a professional appraiser to calculate the value of their company. No client should ever take their business to market with assumptions in these two areas. Help them get the facts so they are making informed decisions about their future.
Deal Killer #2 – Market vs Owners Perception of Value
Once advisors have helped an owner calculate the amount of money necessary to achieve financial independence, it is vital that owners know, before going to market, what the market considers the business to be worth. Advisors who are not investment bankers or business brokers must recruit and work with those members of the Advisor Team to assign an accurate valuation. They should also be able to provide your client with the underlying reason for that valuation so that if there is a disconnect between what the owner needs and what the market is willing to pay for, they can focus on building that value. Slay this Deal Killer by recruiting the right Advisor Team members and getting your owner clients an accurate market valuation.
Deal Killer #3 - The Owner’s Exclusive Focus on Top-Line Sale Price
Owners and advisors must factor into the likely sale price deductions of taxes, debt, transaction fees, and other costs to help owners avoid this specific Deal Killer. This Deal Killer can arise in three different ways.
- The business owner’s failure to attach a precise dollar amount to the net proceeds he or she will need from the sale of the business.
- The business owner’s failure to do more than “guesstimate” what outside buyers would be willing to pay for the business.
- The business owner’s (now seller’s) participation in negotiations with buyers without knowing the proceeds needed and the amount buyers are willing to pay.
The best way to avoid this Deal Killer is to engage in pre-sale planning, before talking to buyers, that:
- Pinpoints the amount of cash your client will need from the sale to achieve financial independence.
- Provides a likely sale price for your client’s company in today’s marketplace.
- Takes into account all of the taxes and expenses that will cut into your sale proceeds.
Don’t let those gross numbers dazzle you and cloud your judgment. To overcome this Deal Killer, simply lay out each of the fees and parties involved that an owner should be aware of before they go to market. If the facts and calculations do not meet the expectations of your client, you should advise that they not move forward with a third-party sale until they do.
Don’t Let Optimism Be the Downfall
As you can see, each of these Deal Killers are variations on a theme and a result of owners being individuals who view a glass as half-full. After all, as Harvard professor Howard Stevenson noted, entrepreneurs started their businesses “without regard to resources currently controlled.” Optimism is likely a necessary quality in starting a business without adequate capital.
In the context of a business exit, however, optimism can result in owners consistently and often dramatically overvaluing their businesses. In doing so, they waste time, money, and effort. In entering the market with an unrealistic asking price, and subsequently withdrawing from the market, owners do significant harm to any future effort to sell the business.
- The advisor's job is to incorporate an understanding of marketplace reality into an owner’s pre-sale planning.
- Successful exits can require years of value-building efforts, but owners who think their businesses are worth far more than buyers do don't know that.
- It is critical to the ultimate success of an owner's exit that they realistically assess likely sale price years before their planned departure dates.