10 Frequent Mistakes

The Ten Most Frequent M&A Transaction Mistakes

The Ten Most Frequent M&A Transaction Mistakes*

1. The owners do not understand the value of the business:
Most owners of closely held businesses have suppressed profits to reduce taxes. The company’s financial statements don’t begin to reflect the true value of the business. The actual financial statements need to be restated to eliminate the owner’s discretionary and non-recurring personal expenses. Attention also needs to be drawn to “off-balance sheet assets,” tangible and intangible. Historical financial statements don’t tell the real story.

2. The owners have an unrealistic price in mind:
Recent surveys indicate that few companies have a current, accurate business valuation. Half of the time owners are unrealistically high in their asking price, and the other half of the time they are low. Whether you think its worth $5 million or $50 million, without a professional opinion for reference purposes, you can’t begin to discuss or justify a selling price that makes sense.

3. The owners do not understand the investor’s motive:
Rather than emphasizing the business’s growth potential, they dwell on past performance. Investors are looking to the future for return on investment and growth potential. “BUYERS DON’T BUY WHAT THE SELLER THINKS HE IS SELLING.”

4. The owners do not have proper counsel:
Talk with business owners who made an ill-fated attempt to sell their own business. Most wish they had used an experienced intermediary. Without professional help, they are prone to taking advice from the wrong people.

5. The owners try to sell to the wrong people:
One of the biggest mistakes is to think that the best investor for the business is a competitor, customer, supplier, or employee. If the deal doesn’t happen, and most don’t, then a great deal of confidential information about your company has been disclosed. Suddenly, everybody knows more about the company’s profits and operations than they should. Keep your intentions confidential unless you’re ready to sell at a rock-bottom price.

6. The owners assume the best investor is local:
Most sellers naturally assume that the market for their business is the immediate surrounding area. The world is now your marketplace and the best investor may be anywhere across the country, or around the world. Thousands of very quiet private investment groups and offshore investors are interested in acquiring profitable, U.S.-based, privately held companies.

7. The company is not positioned for sale:
Organization, growth opportunity, reputation, market conditions, and industry leadership, are some of the many intangible qualities investors appreciate. Documenting improvements that could be made by an investor with new capital helps you to better position the company and increases value. There can be a swing of 50% or more in sale value if the company is solidly positioned for future growth.

8. There is improper documentation:
Investors are evaluating the purchase based primarily on future growth potential and expected return on investment. They want to see what the profits would have looked like if you had run the business like a public company. They also want you to prepare three-to-five-year pro forma financial projections, backed by solid market research substantiating the future potential of the business. Simply stated . . . create a presentation to explain the past and sell the future!

9. The owners do not plan for the sale:
Many business owners have not thought about what their real personal financial needs will be. If you’re willing to wait for some of the payments, the investor has more flexibility to pay a higher price. If you insist on an “all-cash” deal, savvy investors will discount their offering price by 35% or more!

10. Don’t be the first to mention price:
One cardinal rule of negotiating is to never be the first one at the table to mention price. An experienced acquirer who sees the future potential may have a higher price in mind. Value is very subjective. You will always regret “leaving money on the table” if you make this pricing mistake.

* Reproduced with the permission of the Alliance of Merger and Acquisition Advisors.