“Projections? There’s no way we’ll hit those.” The founder nervously laughed. A pin drop could be heard on the conference line. He had casually mentioned to the buyer’s CFO that the projections presented a few months earlier were not realistic. A brilliant CEO who had built an incredible business didn’t realize he had made a costly mistake. After the call, the buyer insisted the purchase price be reduced.
Having spent decades in the industry (the incident above occurred 15 years ago) we’ve seen many talented founders who find themselves in the unfamiliar terrain of M&A inadvertently making the same mistakes. While each deal is unique and different rules may work better or worse depending on the situation, here are 5 mistakes we recommend founders avoid when selling their businesses.
- Rushing into Exclusivity
- Neglecting the Relationship
- Forgetting to Do Due Diligence
- Wearing Rose-Colored Glasses on Deal Structure
The founder who realized on the conference call that his projections weren’t realistic made a common mistake. It is important to strike a balance between realistic and optimistic financials, understanding that buyers often have the opportunity to hold you accountable to near-term projections. If a buyer sees that these projections are unrealistic, you should be prepared for your valuation to take a serious haircut. In fact, missing the financial plan over the course of due diligence is one of the most common reasons deals break down. As a rule, we advise founders to be particularly careful with projections they provide to buyers addressing 2-4 quarters into the future.
Rushing into Exclusivity
We all can agree it’s not wise to get engaged on the first date — the same goes for rushing into exclusivity with a buyer. Just as you’d want to be wary of a date looking to rush into an engagement, be wary of a buyer rushing you to make a written commitment (such as signing an LOI) before a proper courtship. While signing that LOI might feel like it has no cost, the standard LOI grants a buyer exclusivity. Keep in mind that you will have much more leverage if you keep your options open.
Neglecting the Relationship
The focus of any M&A transaction will naturally be the details of the business, but often the relationships between buyer and founder are just as important in crafting the right deal. It can be easy to forget some of the pleasantries in the heat of negotiations, as the transaction process from start to finish can take many months. However, as the process moves forward, don’t forget to continue to nurture the relationship. For example, if a potential buyer offers ideas on running the business, consider the relationship before responding and thank them for their contributions.
Forgetting Due Diligence on the Buyer
When receiving inbound interest, it’s easy to assume that all buyers are genuinely interested in moving quickly to understand the strategic value of your business. The reality is that buyers have different business models themselves: some who move very quickly are intensely focused on finding financial value, others who might be more strategic might have a process of talking to many players in your space over a long period before deciding on a strategy. It’s hard to know what the best buyer match is for your company, but we advise trying to filter out those who show little concern for your interests.
One tip for evaluating a buyer’s motives is to mention that you are considering talking to other potential suitors. Serious buyers will understand that it might be in your best interest to explore multiple options. While they might not encourage this, they won’t actively discourage it, either. On the other hand, bargain hunters and self-interested buyers are more likely to try to pressure you away from talking to other parties. You can expect that buyers will do due diligence on you and your motives, so you should be sure to do the same.
Wearing Rose-Colored Glasses on Deal Structure
When considering different offers, it can be enticing to take an earnout deal that promises more money if certain post-deal milestones are achieved. This deal structure is often used by buyers to reduce risk, but sometimes can backfire on founders. If you have a choice, only do a deal where the cash up front is enough to meet your financial goals, and take a critical look at all deal components before committing to any buyer.
In short, there’s a lot that goes into selling a business. You’ve spent years building a great business, so we hope you can avoid these critical mistakes in order to fully realize your transaction goals.
Horizon Partners is a boutique M&A advisory firm for bootstrapped technology businesses. To learn more about preparing for a transaction, subscribe to the Horizon Partners blog.