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Exit Planning Mistake No. 7 – Not Being Committed to Your Exit

By Generational Equity

09/19/2016

Today we cover another exit planning mistake that you need to avoid when pursuing buyers for your business: Not being fully dedicated to the process.

For many entrepreneurs, selling the family business can be a tough emotional decision. We recognize this since many of us have been involved in lower middle-market M&A transactions for several decades. For many business owners, the idea of finding a buyer and moving on to the next stage in life is very appealing. After years of owning and operating a company, and assuming 100% of the risk associated with it (not to mention the hours, months, and years of sweat equity poured into the venture), the concept of monetizing one’s largest asset is extremely attractive. Even so, the idea of leaving the “baby” you created can be tough to do at the 11th hour if not fully committed.

For many sellers there really is no option in this decision to sell. One of the “Big D’s” has reared its ugly head and made the exit inevitable no matter what emotions become paramount as the final close approaches (for those of you unfamiliar with the term, the “Big D’s” refers to Death, Disability, Divorce, Disinterest a.k.a. burnout, and Disagreement among partners/family members). When one or more of these is the primary motivator, then typically sellers are very committed.

Unfortunately, buyers know this and naturally drive a hard bargain when negotiating. That is why we have suggested several times over the past few years that you sell when the market tells you it is time not when external circumstances force you to. See Exit Planning Mistake No. 5 – Selling at the Wrong Time for further details.

Getting back to our theme here in Mistake No. 7, you might be wondering, “Why does this matter? Lots of people change their minds and pull out of business transactions with little or no consequences. So why can’t I test the waters with my business and just see what kind of offers I get?”

And certainly you could do that. However, a business sale is not like the sale of your house or a car. Either of these you could cancel with little recrimination (other than hurt feelings) and face little financial loss. However, selling a business and reneging at the 11th hour carries with it some serious potential consequences:

  • Confidentiality will most likely be compromised.
  • If you test the waters, change your mind, then re-enter the market, professional buyers will be wary .

Consider Confidentiality

The first point is critical. Once you sign a letter of intent with a buyer, you will begin the due diligence process. This 60- to 90-day timeframe requires that you disclose literally EVERYTHING about your business to the buyer. Most business owners have a vague notion about the definition of due diligence. But until you experience it first hand, you have no idea of the level of detail required. To help you grasp the concept of the due diligence process, we asked a few of our clients to describe it:

The point of these discussions is simply this: Entering due diligence is a march that you don’t want to decide to back out of; testing the waters opens your business up to all sorts of confidentiality issues. Most frequently, it is the employees who first begin to suspect something is up when all sorts of strangers begin showing up, touring the facility, asking questions, and holding long, closed-door meetings with management. Rumors often are created to fill information gaps and the last thing you want to do is have several key employees exit once you decide not to sell because you are personally not ready.

So be ready to do so!

Buyers Want to Talk to Committed Sellers

The second point above is just as important: Professional buyers (the kind you want to attract to your business) simply do not have the time available to waste 6-8 weeks negotiating with you only to have you determine that you are not emotionally ready to depart. These folks look at an estimated 500-1,000 opportunities annually and don’t have the bandwidth available to lose significant time working with a less-than-committed seller.

Then, if you do pull out of the deal at the last minute due to cold feet (even if the deal is a good one) and decide a year later to re-enter, buyers, many of whom you will have approached before, will be very concerned about you changing your mind again. You will need to make great strides in convincing them that this time you are serious. This can be very challenging process and again, if buyers sense that you are now more desperate to sell than a year earlier, they will most likely negotiate a hard bargain.

This is a key reason that buyers like to look at Generational Equity clients: Our process ensures that business owners are committed to the goal because of two steps we put them through:

  • We charge an upfront commitment fee.
  • We complete a full evaluation on every client before agreeing to take them to market.

From a buyer’s perspective, both of these are equally important. The commitment fee does exactly what the name implies: It eliminates those testing the waters and ensures that the seller has some skin in the game. As you can imagine, buyers, knowing that a committed business owner is in our system, move our deals to the top of the 500+ opportunity pile!

Just as important, every client we accept goes through a 30- to 90-day business evaluation with us. This allows us to analyze the business to not only determine the current Business Enterprises Value but we also provide recommendations to sellers on steps they can take to make the business more sale-able and enhance its value going forward. Again, for buyers, knowing that a seller not only knows the value of the business before engaging with buyers AND is working on improvements makes our clients far more attractive than others.

Time and space do not allow me to drill into this seventh mistake further; if you would like to learn more I recommend attending a Generational Equity exit planning symposium soon. While there you will be able to meet one on one with our M&A professionals and get further details on all seven mistakes to avoid and more!

To find out if your business qualifies you to attend (we have strict size and industry standards for attendees to meet), please call me at 972-232-1125 or email me at cdoerksen@generational.com. Please also feel free to visit our website and drill into these links for further information about us:

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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