In part one we covered the first five mistakes owners make when selling their company. Here are five more, plus a bonus, and how to avoid them. Owners tend to make these because selling a business is unfamiliar terrain with high stakes.
Not including all of the major deal terms in the letter of intent
The LOI exists to establish a meeting of the minds on valuation and other key terms before the owner grants exclusivity and both sides spend real time and money on diligence and documentation. Owners often fail to negotiate every major term up front and leave key items out. That matters, because the owner's bargaining power drops sharply after the LOI. The LOI is usually the high water mark of a deal; it rarely gets better, so it is the owner's best chance to drive a hard bargain.
Agreeing to an exclusivity period that is too long
It is common to grant the buyer an exclusive negotiating period after the LOI, typically around 60 days. Owners often agree to 90 days or more, which is a problem. A long window can leave the owner hog-tied if the buyer is unwilling to invest the time and money to close, or is angling to renegotiate the agreed terms. The owner loses time and the chance to negotiate with other serious buyers while the clock runs.
Not receiving anything of value in exchange for exclusivity
Taking the company off the market has real value for the buyer. Before granting exclusivity, the owner should be confident they have negotiated the best deal, identified the right buyer, and confirmed the buyer is committed and has the resources to close.
Not being willing to say, "I don't have to sell"
An owner who is not under pressure to sell can regain negotiating power by putting the buyer on notice that the deal will not close unless both sides reach commercially reasonable terms. This is particularly effective after the LOI, can put the buyer back on their heels, and can help the owner achieve superior terms.
Not being responsive to buyer information requests
Deal making runs on momentum. When owners fail to follow through on reasonable requests in a timely way, within a day or two, not a week or two, it hurts the deal's momentum. The buyer may also decide the owner is not a committed seller and turn their attention elsewhere.
Bonus: Announcing the transaction before it closes
Owners must keep complete confidentiality until closing. The more people who know, including management, the more likely the news leaks. If it does, key customers and vendors may get spooked and look to competitors, and competitors may exploit the disruption to poach customers. Employees may grow anxious and seek other jobs. Any of these can damage the company during the process and put the deal itself at risk.
There are many pitfalls when selling a company, but an owner who recognizes them can steer clear. Knowledge is power, and owners who avoid these mistakes improve their odds of achieving their objectives.
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