With 2024 in full swing, we can reflect back on why 2023 was so challenging and better understand the primary factors that caused many transactions to fail. The M&A industry is very broad in terms of deal size, but according to Bloomberg Law the number of successful transactions in 2023 was the lowest year on record over the past 10 years. In our firm’s experience, the first half of 2023 was very active at a near record pace while the 2nd half slowed down due to lack of “sellable” businesses on the market but buyer activity remains strong. While there are many reasons why businesses fail to sell, the following are the top 3 mistakes that owners should try to avoid.
3 Selling Mistakes for Owners to Avoid
1) Lack of Planning
Far too many owners wait too long to engage with a firm like ours in the sale of their business. Many times, either extreme burnout or other outside circumstances such as health or family related issues become the driving factors which are easy for buyers to see and can end up substantially reducing the overall value of the business. Our firm is grateful for the opportunities we’ve had to work with many great businesses over the years. However, it’s still frustrating when seasoned owners who could have made strategic changes in their business years ahead of time are unprepared when the time comes and forced to settle for much less at the closing table.
To help address this growing need, for business owners that foresee selling within the next 2-10 years, our firm offers the Strategic Sellability Plan (SSP) (strategicsellabilityplan.com) which breaks down the key factors that drive the value and sellability of a specific business. The SSP provides a unique perspective in exit planning and is designed to work in tandem, reinforcing the relationships with the business owner’s key advisors including financial planners, accountants/CPAs, and, business coaches.
2) Financial Discrepancies
In a recent published survey of failed transactions in 2023, nearly 40% were due to lack of the ability to secure financing or discrepancies in the financial reporting.
With the growing uncertain economic conditions, even what appears to be small “explainable” discrepancy can easily add to the overall uncertainty and cause buyers to lower valuations or back out altogether. This is why it’s important to start preparing financial statements well in advance of selling.
In fact, many private equity groups and other buyer groups are requesting seller-side Quality of Earnings (QofE) reports. In the past, QofE reports were part of the buyer-side due diligence, but the demand is growing for seller-side QofE reports (depending on size and industry). One of the recommendations we provide in our SSP plan is whether or not an owner should consider a QofE when going to market.
3) Ignoring Market Feedback
As the saying goes “a business is worth what someone is willing to pay for it” so if a business has been on the market long enough to have received a good amount of buyer feedback, then it’s time to listen to what the market is saying.
Early in the process of evaluating a business, the estimated range of perceived value can be very wide depending on the type of buyer, the industry, and other key assumptions. The process of taking a business to market allows these assumptions to be validated. The mistake that owners often make is ignoring feedback when multiple independent buyers are effectively providing the same message.
It’s important that feedback is considered in the expectation of true market value or at the very least should be used to adjust the marketing approach. Our firm often uses a “price to be suggested by purchaser” strategy when selling a business to help allow adequate time for this type of market feedback and apply a more iterative approach on the valuation of the business (which can include different types of buyout structures). While this approach involves more effort and time, it often results in maximizing the value of the business for our clients at the closing table.
The majority of our business comes from referrals, and we appreciate your continued trust in our firm.
Robert W. Amerine
President, CBI, M&AMI
