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 a business owner worked so hard for.
Selling your existing business or buying a business (mergers & acquisitions or M&A), is a great way to focus on a new time in your life or expand your existing business. M&A is seldom 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 walk away from the deal – I’ve seen it happen.
When you are well prepared, you’ll have a better outcome with fewer surprises. In planning your exit strategy, you must be diligent to avoid the pitfalls listed below:
1. Missing documents. In advance of an acquisition, you should prepare all the necessary paperwork and have it ready and available. Organized documentation should be a top priority and is also critical in raising capital and when trying to go public. The integrity of your financial documents is critical to any acquiring companies. These documents may include:
• Profit & loss statements for the current and past three years
• Balance sheet for the current and past three years
• Cash flow statement for the current and past three years
• Business tax returns for the past three years
• Copy of any current leases (real estate and equipment), if any
• Insurance policies
• Supplier and distributor contracts
• Employment agreements, if any
• Offer to purchase agreement
2. Lack of audited financials. Your finances should be in order and your financial statements should be prepared in accordance with GAAP (Generally Accepted Accounting Principles). Prospective buyers will not be impressed by sloppy financial reporting—your financials are the last place that they want to find any surprises. Accurate and timely financials should always be a goal, not just when preparing for an exit. If you do not have an annual audit done, talk to your advsior about the wisdom of having this done.
3. Misaligned ownership structure. What is your ownership structure? A shareholder, as owner of a corporation, has certain rights. These are distinct and different from those of a member of a LLC, a partner in a partnership or a holder of preferred stock. If it 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, copyrights, trademarks, etc., there should be clear documentation around this. The IP that your company holds can be a significant asset; without proper documentation, 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 – a savvy buyer will make adjustments to the purchase price for personal and non-recurring items.
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. A potential buyer does not want to discover outstanding sales tax issues when digging in your books. Be prepared to answer any questions pertaining to nexus.
7. Committed contracts. If your company has signed any long-term contracts (e.g. with a service provider, for real estate, etc.), make sure the documents are made available to the prospective buyer. They may be obligated to pay these 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 include the value-add of its people. If your key team members will not be part of the newly formed company post acquisition, this can negatively affect the purchase price. When establishing your equity plans, give careful thought on how to promote retention to incentivize key team members to stay before and after the acquisition.
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. Start 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!
Acquisition Advisory Services You Can Depend On!
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. 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), to a family member or company management and are typically the single largest event in an owner’s business life. If you have questions regarding a potential sale of your business, please contact AndrewTucker@B2BCFO.com .