Imagine your startup company or 30-year-old family business getting acquired. It sounds like it would be a dream. But in many cases, the transaction can lead to the end of everything business owners work so hard for.
Buying an existing business along with selling businesses (mergers & acquisitions), is a great way to buy into a new business or sell or expand your existing business. M&A isn’t simple. Lots of owner equity has been lost with poor acquisitions.
There’s a lot at stake within these complex transactions. Unexpected issues can harm an acquisition to the point that a potential buyer may reduce their offer or turn their back from the deal.
When you are proactively prepared and you prepare a potential buyer in an acquisition, you’ll have a better outcome with limited surprises. In planning your exit strategy, B2B CFO® recommends being diligent by avoiding the pitfalls listed below, that no acquiring company wants to experience during an acquisition:
1. Missing documents. In advance of an acquisition, you should prepare all the necessary paperwork and have it ready and available. Organized and fulfilled documentation is also critical in raising capital and when trying to go public. Creating the necessary documentation should be a top priority. The integrity of your financial documents is key to any acquiring companies. These documents may include:
• Profit & loss statements for the current and past two to three years
• Current balance sheet
• Cash flow statement
• Business tax returns for the past two to three years
• Copy of the current lease
• Insurance policies
• Supplier and distributor contracts
• Employment agreements
• Offer to purchase agreement
2. Lack of audited financials. Your finances should be in order and your financial statements should be done in accordance with GAAP Generally Accepted Accounting Principles). Prospective buyers are not impressed by sloppy financial reporting—your financials are the last place that they want to find any surprises. Again, buttoned-up financials shouldn’t only be a goal when facing an exit; this is an important step to take as your business grows.
3. Misaligned ownership structure. A shareholder, as owner of a corporation, has certain rights. These are distinct and different from those of a LLC, corporation, and a holder of preferred stock. What is your ownership structure? If it suddenly isn’t clear who owns your company and/or who makes the decisions, this can be a serious problem.
4. Issues with intellectual property. If your company holds any patents or has other IP, there should be clarity—and documentation—around this. The IP that your company holds are a significant asset; without them, your company can look less appealing.
5. Mixing personal and business finances. A common mistake business owners make is not keeping personal and business funds separate. Prospective buyers want a clear understanding of your finances. When you blend your personal finances with your business, this creates confusion. Make sure that you separate your transactions and that your books clearly reflect this separation.
6. Outstanding sales tax compliance issues. If you have product or subscription sales, or traveling sales personnel, you need to be well-versed in your tax obligations to ensure compliance. If a potential buyer discovers outstanding sales tax issues when digging in your books, they will not be pleased.
7. Committed contracts. If you’ve signed your company up for a long-term contract (e.g. with a service provider, for real estate, etc.), this can be an unwelcome surprise to a prospective buyer who will suddenly find themselves on the hook for your prior commitments.
8. Loss of existing talent. Often one of the largest selling points for a buyer of a company is its talent and employees. When someone is interested in buying your company, that usually includes the value-add of its people. If your key team members will not be part of the newly formed company post acquisition, this can be a risky obstacle. When establishing your equity plans, give some thought to how to promote retention to incentivize key team members to say.
9. Failure to hire the right advisor. The smallest misstep during M&A activity can lead to a significant drop in price. Have the right experts and specialty teams in place to help you avoid devastating outcomes. It is best to build your advisory team two to three years before the target date of the sale or transfer. The business owner can use the skill and expertise of these professionals to identify obstacles and to help with the transaction. B2B CFO® is ready to help!
The business of buying or selling a business is very different than the business of running a business. B2B CFO® literally wrote the book on the best practices for exit strategy planning. B2B CFO® is the largest CFO services firm in the nation. In addition to publishing an exit strategy guidebook and developing a proprietary software platform that helps owners understand and examine the sales process, many B2B CFO® Partners hold the Certified Business Transition Expert™ designation. Our Partners are trained to help business owners prepare for and execute their business transitions. Business transitions range from a sale to a third party, an Employee Stock Ownership Plan (ESOP), or to a family member and are typically the single largest event in an owner’s business life.