By: Don Wharton
For many business owners, the thought of selling the culmination of years of dedication and tireless efforts is a daunting yet vital consideration. As they stand at the crossroads of this major decision, it is imperative that owners equip themselves with an understanding of what potential acquirers are seeking to maximize the value of their hard work while ensuring their legacy is entrusted to the right hands.
Prepare to be sold
The most attractive businesses are often those prepared for sale at any moment, with detailed financial records, secured intellectual property, and up-to-date documentation. Clean books and accurate documentation are testaments to the business’ operational health and reflect well on the company’s management. Proactive preparation of all relevant information not only streamlines the due diligence process but can also increase the trust acquirers have in the transaction.
Transparency and honest representation
Presenting facts accurately without embellishing financial performance or operating capabilities is critical to the selling process. Discrepancies between what may be presented and the actual performance of the business can raise red flags and potentially jeopardize the deal. To confirm the validity of the information shown by the business, acquirers will conduct a thorough review of the company during the due diligence process, which includes financials, legal concerns, and all relevant business challenges.
While small, honest errors are by no means deal breakers, if there are significant inconsistencies or intentional misrepresentations, acquirers may question the reliability of other information provided by the seller and the overall integrity of the business. Should the inconsistencies be severe enough, the acquirer will pull out of the deal, wasting valuable time for all parties involved. Conversely, providing more relevant information than requested is a good practice that can instill confidence in the acquirer that the business has nothing to hide and everything is above-board.
Accounting for expenses properly
Keeping personal and business expenses separate is crucial for acquirers to understand the true costs and financial health of the business. Mixing unrelated personal expenses obscures profitability and increases the perceived costs of running the business, potentially lowering the company’s valuation. For example, some businesses may employ the owner’s family and friends who do little work for outsized compensation, which raises expenses while also demoralizing other employees and negatively impacting the overall culture and health of the company.
Alignment of culture and values
A company’s culture and values can significantly shape the success of the acquisition. Acquirers typically seek companies whose principles, ethics, and values reflect those of their own, as it suggests a more seamless integration post-acquisition. While there can be significant differences in culture across acquirers, most will emphasize values such as honesty, integrity, accountability, and dedication since these attributes signal a high-quality business that is likely to endure over the long term.
Beyond the insights gained from engaging with the leadership team during the due diligence process, acquirers can gain an understanding of the company’s culture by perceiving how owners treat their employees. Owners who carefully consider the ramifications of the acquisition from the perspective of their employees by thoughtfully planning post-sale employee compensation, titles, and benefits are more likely to nurture the motivated and ethical teams that acquirers are looking for.
View the transaction objectively
Business owners should be aware of the endowment effect, the bias that causes individuals to assign a higher value to assets they own than to an identical asset they do not. Viewing the transaction from a more neutral point of view helps set realistic expectations and facilitates smoother negotiations.
Some owners may hear stories where a similar business sells for a high price and expect a similar outcome when they decide to sell. The reality is that not all businesses will command the same price within the same industry, and only a minority will be fortunate enough to be acquired by a strategic buyer at high prices. Various factors such as market conditions, the strategic value of the acquisition, and other intangible variables can all influence the price an acquirer is willing to pay.
Aim for a win-win outcome
The goal of any acquisition should be a win-win outcome where both the seller and the buyer feel they have benefitted. Successful acquirers, especially those that frequently acquire new businesses, understand that their reputation hinges on the satisfaction of all parties involved. Therefore, ensuring the acquisition creates positive outcomes for both themselves and the seller is essential to the acquirer’s long-term growth and success.
Businesses that position themselves accurately with clear and relevant documentation, proper accounting of expenses, and the right culture and values are those best equipped to attract a suitable acquirer. Additionally, viewing the acquisition through an objective lens maximizes the valuation of the business and the chances of a successful deal, creating win-win outcomes for all sides of the transaction.
