One of the challenges of exiting any business is to avoid common pitfalls that cause exits to fail. Even if an exit transaction closes, these pitfalls can result in lower valuations and less favorable deal structures for the business owner. Below are 20 common pitfalls that should be avoided (and there are many more).
- Not understanding all your exit options and jumping right into a selling process.
- Using simple formulas and industry rules-of-thumb to determine your company’s valuation.
- Believing the business is ready to be sold when it is not.
- Not knowing what makes a company attractive to sophisticated buyers (“strategic” and “financial” buyers).
- Not understanding the “market process” for buying and selling medium-size companies and the valuation methods used by sophisticated buyers.
- Failure to maintain confidentiality during the selling process.
- Handing out financials too early in the process.
- Believing timing does not matter and you can sell the company for the same price whenever you want to.
- Not understanding that a company has multiple prices and not just one price. (The same company can be worth different amounts to different buyers and ultimately it is the market and the buyer that determines the price and not the seller.)
- Relying on the wrong type of professionals to manage a transaction process.
- Thinking you already know the “best” buyer and failing to properly qualify buyers before signing an LOI (Letter of Intent).
- Not understanding why sellers prefer stock sales and buyers prefer asset sales.
- Not knowing the amount needed to provide personal financial security and to fulfill your post-exit aspirations before initiating the sale process for the company.
- How too much “recasting” can negatively impact a company’s historical performance.
- Not understanding before starting the transaction process rules governing revenue recognition and the amount of routine and normal working capital that is needed to operate the company.
- Not knowing that limited organic growth, customer concentration, significant capital expenditure requirements, and dependency on one or two essential suppliers can be major value detractors.
- Not planning an exit holistically by failing to define specifically both your corporate and your personal goals you are seeking to achieve by executing a transaction.
- Naming a price versus letting the market determine the price. (The buyer and the market are the ultimate determiners of market value.)
- Failing to understand why economic value is not what the seller thinks he or she should be paid … nor is it a function of taxes that a seller will have to pay.
- Not knowing why price and value are usually different and failing to know the intrinsic value of your company before starting a transaction process.
ExitHigh’s 5 step approach to planning and executing exits helps you avoid pitfalls by laying out your path to exiting wisely and achieving personal fulfillment.