Top Five Deal Killers
Are you aware that only an estimated 20–30% of companies brought to market actually sell? To increase your odds of success, it is essential that you are educated, realistic, and committed. As you consider selling your business, we share our perspective on the top reasons why deals die.
1. Inconsistent Financials
Most businesses under $30M revenue have poor financial records that defy fundamental accounting rules. Companies often report on a cash basis, which does not convey the real-time financial condition of the company or working capital needs. While basic bookkeeping is generally sufficient to file tax returns, poor financials will in inhibit successful M&A transactions. More than any other factor, buyers scour financials and poor books are a red flag. Professional buyers look at hundreds of deals per year, and if financials are not well-prepared, they will move on to the next deal. For buyers to satisfy their stakeholders, and for sellers to achieve a market valuation, GAAP (Generally Accepted Accounting Principles) financials are a must.
2. Unreasonable Seller Expectations
Sellers’ valuation expectations are often disconnected from reality. Seller expectations may stem from the ‘country club valuation’ a friend supposedly received or extrapolated from public markets. Before going to market, sellers must consult with an experienced M&A firm who will normalize financials to properly reflect adjusted cash flow, provide data on comparable company sales, and provide guidance on probable deal terms. Sellers must appreciate that buyers assess value across quantitative (financial) and qualitative (team, industry trends, etc.) dimensions. Don’t waste your time unless you are comfortable accepting probable market value and deal terms. Before we accept a client, we ensure that all three ‘legs of the stool’ are well-supported: business performing well, owner is financially prepared (can afford to sell), and owner has a post-retirement plan.
3. Surprises uncovered during Due Diligence
Buyers expect sellers to be transparent and present ‘the good, the bad and the ugly’ up-front. Buyers perform detailed financial, legal, HR and operational diligence. When buyers discover a previously undisclosed issue, they lose trust in the seller and question what else the seller is hiding. I once had a $100M strategic buyer walk away when they discovered the seller had been employing undocumented workers. Seller didn’t think this was worth mentioning to me or the buyer! Marketing materials must disclose key issues, perceived risks, and mitigation plans.
4. Time
There’s an old saying in the M&A world — time kills all deals. The longer a deal drags on, the more likely the level of interest or valuation expectations change for one or both sides. Sellers lose key customers or employees. Buyers find deals they prefer, or their lender increases borrowing costs. Delays are common as third-party specialists are introduced to the process. To get a deal done, both sides need to maintain open and honest communication throughout the process.
5. Not Having Advisors with M&A Experience
It’s imperative that sellers engage advisors with M&A experience. This team includes the CPA, CFO, corporate attorney, wealth manager, and M&A Advisor, who serve as deal quarterback, while you can continue to run your business optimally.
As you consider selling your business, we encourage you to speak with an experienced M&A Advisory firm that can will increase the odds of your successful transaction. Kinected Advisors has an 85% success rate our transactions and we would love to speak with you.
