Introducing TigerLine Advisory

In this article, Will Silton of TigerLine Advisory follows Amy VanHaren’s post, Five Things I Wish I’d Known Sooner About Selling My Business, and dives into the common pitfalls that drive the >70% failure rate in selling a small business.  As a longtime operator, acquirer, seller, and now advisor of private businesses, Will has seen a lot of what can go wrong in the sale process, and hopes to inspire business owners to take actionable steps that optimize for success.

Let’s start with the most common reason a business doesn’t sell, which is…

… simply that the owner never engages in a concerted effort to do so.

67% of business owners never take formal steps to sell their business, usually for understandable reasons: they have a day and night job running it, assume their children will take it over someday, have confidence in buyer interest when they want to hit “Go”, or don’t know where to start.

But life happens.  An owner (or key leader) suddenly needs to step away, their children develop new career aspirations, or potential buyers go another direction.  Then, what was formerly a position of control of their business’s destiny can become a position of desperation.

As discussed later, it’s never too early to start getting ready and planning out options.  And while selling your business is a daunting process, there is help available.

You’ve planned it out and you decide to sell – now beware the pitfalls

Being in the 33% of business owners that take steps to sell is the easy part.  Once underway in a sale process, it gets a lot harder! Greater than 70% of business sale processes fail – and there are four common reasons why. 

1) Valuation Gap

You as owner want X and the buyer is offering Y.  You are convinced the buyer is undervaluing your business! But, did you:

• Share clean, multi-year historical financials and defensible financial projections? Most small businesses never prepare projections, but if credible and well defended, they typically unlock higher deal value.

• Lay out and properly support all the expense add-backs to your profits that would occur under the buyer’s ownership?

• Research what valuation multiples are commonly paid for similar businesses to yours?

When you and the buyer cannot agree on the value of your business, then one of you is mispricing it.  Let that not be you.  Mispricing your business can leave deserved value on the table if your number is too low, or scare off serious buyers if it is too high.

A common driver of a valuation gap is business results deteriorating in the months it takes to finally close the deal, as the owner and management team – consumed by the deal process (especially in the absence of an advisor) – take their eye off the ball.  This can incite a “retrade” and potentially kill the deal.

2) Deal Structure

You want X and the buyer is offering X.  Hooray – you’ve done it!

And then the actual deal terms come in.

The buyer is offering you 50% cash at close.  The other 50%?

• 25% is earnout, paid over time if you stay with the business and achieve lofty results. (About 25% of deals have earnouts; on average, they span 24 months and fully pay out about half the time.)

• 20% is “rolled equity”, or stock you get in the newly formed company or buyer’s company.  This equity can be worth a lot if the business improves under the new buyer… or it can go to zero if things don’t work out.

• 5% is held back in escrow. (90% of deals have escrows.)

This is a potential (but common) example.  Unprepared sellers might fixate on the total deal value, but deal structure is just as important in meeting your post-close financial and lifestyle objectives.

3) Diligence Issues

Once due diligence begins, buyers will ask for a mountain of company documents, and follow with a thousand seemingly inane questions.  If the buyer finds something that puts too much risk into their ownership, they may retrade or walk away entirely.  Here are just a few of the issues I’ve seen ruin a deal:

• Tax liabilities (not just income tax, but also sales and use tax, payroll tax, 280G, etc.)

• Regulatory or legal issues (like lawsuits, environmental penalties, or unsafe practices)

• Accounting irregularities (found through a buyer’s super deep “quality of earnings”)

• Payroll or benefits non-compliance (like not paying overtime or administering benefits properly)

4) Confidentiality

The more the sale process infringes on the business (specifically, its people), the more likely it is that employees will accidentally find out about it.  This is the last thing an owner wants.

I’ve seen employees quit in droves, publish smear articles about buyers, and even unionize after finding out about a deal secondhand.  This can scare off buyers or force owners to suspend the process. 

An advisor runs the process outside the day-to-day activity of the business, thereby minimizing confidentiality risk and allowing ownership to maintain control of the narrative.

Next steps

1) Have a no-strings, frank conversation with a specialist

Even if you think you’re light years away from selling your business, remember that your situation can change, unexpectedly, in an instant.

Start conversations now with an experienced advisor to help you define what a good transition would mean for you, your team, your customers, and the people who depend on your business.  A good advisor should help you identify diligence issues to clean up and help you prepare for a process, but should only encourage you to start one when you and the business are ready.

The advice and knowledge you gain from these initial discussions will be extremely valuable.  Revisit this conversation regularly.

2) Get a business valuation

Ask an advisor to objectively assess and value your business and its salability.

Business valuation is a sophisticated science, quite different from selling a house or assets at book value.  The best advisors understand how qualitative factors like business environment, strategic position, management strength, and customer mix affect valuation.

Even if you aren’t imminently selling, having a regular business valuation done provides you with actionable insight into how to improve your business over time (and if it’s working) and how to best position it to eventually sell.

3) Outsource the process

When you are ready to initiate a sale process, don’t go it alone.  It is painful and risky to continue running your business while also trying to sell it properly.  Find an advisor with a track record of deal-making, a vast but targeted buyer network, a battle-tested process, and a financial incentive tied to your own success.

Historical deal data show that outcomes materially improve with the help of an advisor:

An experienced advisor lets you and your management team focus on maintaining business performance.  In the event the business doesn’t sell, it will be valuable to have maintained performance and confidentiality so you can go back to a healthy business as usual.

And you can bet that deal negotiations will get messy.  Your advisor will contend with the more contentious negotiating issues (and all of the inane diligence questions) so you can preserve your relationship with the buyer – the same buyer that you are likely to continue working with after the deal closes.

Remember…

These are the first steps to put you in more control of your exit strategy.  When you decide to exit, it should be on your terms.  You do not have to navigate the process alone, and you should not need to wait until a buyer appears to start building your plan.

This content just scratches the surface of business valuation and transacting, so reach out to Will at wsilton@tl-adv.com if you want to learn more.