Below are some of the mistakes/missteps we have seen made by private business owners in the sale of their business and/or raising capital. But, before we tell you the problems, we will give you a recommendation to hopefully avoid potential mistakes.
1. Recommendation: We recommend that you have at least a one hour meeting with the following individuals as you prepare for a sale/capital raise.
In most cases, these professionals would be pleased to meet with you, at no cost, to “put you on the right road” to a superior result when you are ready to sell/raise capital.
Also, business owners should start the process in time to make sure they are exited when they want to exit. For example, for some businesses, the likely buyer may be a private equity firm. Private equity firms, in a platform investment, usually may only buy 50%-80% of the business initially and they require the owner/manager to stay on with the business anywhere from three (3) to seven (7) years to help them grow the business at which point the business is sold, re-capped or taken public to achieve the final exit. Therefore, if you are 55 years old and want to be “completely out” by the time you are 60 years old, then you need to start a transaction when you are 54 years old (one year to complete the transaction plus five years of employment running the business). These partial sale/re-capitalizations are often a good fit for a private business owner that is not ready to retire. They allow the private company owner/manager to “take some chips off the table” to secure your retirement but still be part of the business and potentially get a “second bite at the apple” when the company is totally exited 3-7 years later.
Additionally, most buyers want at least one year, and perhaps several years of audited statements. However, audits can be expensive. The potential solution is to have your outside auditor perform year-end procedures work EACH YEAR-including Accounts Receivable/Payables cut-offs, inventory test counts etc. This work is typically far less costly than an audit but allows the outside accountant to upgrade a “Review” to an “Audit” at any time, usually at the time of sale/capital raise.
As mentioned above, failing to sell/raise capital when your sales/profit trend line is on a continual upswing can be a significant mistake. One “hiccup” breaks the trend line and can scare buyers/investors and may lower the price (at best) and can result in no ability to sell/raise capital at that time (or worse). Many owners have experienced this issue first hand by not selling/raising capital during the “boom” years of 2004-2007 timeframe and now have significantly lower numbers due to the recession and now need to re-establish the company’s trend line, a multi-year process that can delay a sales/exit at the time you want to exit.
During the sale process, it is extremely important not to miss your numbers. Missing your numbers is a primary cause of lowering prices (at best) and killing deals (at worst). It also creates a credibility issue between you and the buyer/investor if you will be staying with the business for some time after the transaction.
Accelerate accounts receivable collections, take extraordinary dividends out of the company, slow down paying vendors/suppliers, slow down inventory purchases or fail to make normal or critical capital expenditures etc.. Most buyers are very sophisticated. They will usually uncover such issues in due diligence and it not only negatively affects the price and ability to complete the deal, but also, the all-important ingredient of trust and credibility. Run your business as you normally would.