Owners are great at running their business. When it comes time to sell, though, they are prone to common, costly mistakes, because selling a company is new and uncharted territory and not what they do every day. These missteps waste the owner's and the buyer's time and money and can bust a deal. The good news is that most are within the owner's control and avoidable. Part one covers the first five.
Not entering into an NDA, or signing one that is not in the owner's interest
Owners often get caught up in the deal making and either skip the non-disclosure agreement or let the buyer tender it. The problem is that buyer-tendered NDAs favor the buyer. They may omit terms an owner needs, such as a sufficient term of two to three years rather than one, and an employee non-solicit provision. Owners should consider tendering the NDA themselves, or confirm the buyer's version includes the necessary terms.
Providing information without a pitch or any context
Owners often forward financial statements and other primary information without context or a carefully crafted pitch. Without explanation, a buyer is left guessing: why is the company less profitable than expected, what are these unusual income statement items, what are these balance sheet assets and liabilities? It must be clear what quality of earnings and cash flow are being offered, and what balance sheet supports them.
Sharing too much before confirming the buyer is serious and capable
Closing a transaction is a three-legged stool: the buyer must be motivated, knowledgeable, and have the resources to complete the deal. If any one leg is missing, the deal is unlikely to close. The owner should confirm all three early, before spending significant time with an unqualified buyer.
Allowing the buyer to do anything they want during due diligence
Once engaged, owners may give the buyer carte blanche to conduct any diligence at any time. The buyer should ultimately be allowed thorough diligence, but the actions need to be staged to the progress of the deal. A buyer should not talk with employees, customers, or vendors, or review intellectual property, until closing is highly, if not virtually, certain. If the deal falls through, the owner cannot be left with a damaged asset. Until the end, the owner must stay in control and protect the confidentiality of the company's assets and people.
Getting too friendly with the buyer, and skipping a check on their integrity
Becoming too friendly with a buyer is risky. It makes negotiation harder, because friendship makes the tough conversations buyers and sellers must have more difficult. The owner should investigate the buyer's background before getting far into the deal. The integrity of both parties is essential to deal making, and the owner should feel confident they could do the deal on a handshake and take the buyer at their word.
Those are the first five. Part two covers the remaining five, plus a bonus mistake that can quietly damage a company before the deal even closes.
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