According to informal interviews with owners of middle market businesses who sold all or portions of their companies, the determination to sell was among the most difficult decisions in their lifetimes. Many shared that the sale was one of the most important milestones on the journey through life.
As important as selling decisions were to owners, the vast majority indicated they made significant errors in the process. While few wished to undo their transactions, owners recited a long list of things they did wrong. Some sold the business for too little. Others fought for the highest price only to see unwanted post-closing consequences unfold for employees. Some wished they sold to family members. Others wished they had not sold to family members. Some sold too soon. Others held on for too long. Some accepted more post-closing risks than they should have. All reported they paid too much in taxes. The common lament from former owners was this: “I wish I knew then what I know now about transactions. I would have done things differently.”
Business owners recognize the gravity of the transaction; yet, they don’t discover and/or appreciate the relevant issues involved in transactions until after the sale, which is too late to make an impact. Like taking fingers off a chess piece, owners are stuck with the sale outcome after they sign all the closing papers.
Why is it so hard for owners to make wise selling decisions?
The answers are as vast as the number of owners, but several issues regularly arise:
Owners are connected to their companies at a visceral level. Some describe the connection in relational terms like a child or significant other. But most say the business is a part of themselves. It is an extension of who they are. It is not an asset among others in a portfolio. It is highly personal. Consequently, emotions and feelings frequently obscure objective decision making.
2. Resistance to Change
Few people are comfortable with change; but a business sale represents tectonic, wholesale changes for owners and their families. Unless there is a compelling vision wooing the owner to new challenges, it’s hard to let go of the status quo. For some, a sale is a concession to age and mortality; so it is put off for as long as possible.
3. Non-Ordinary Business Activity
M&A transactions are far outside the scope of normal business activities and are usually quite disruptive. Transactions require hundreds of hours of intense preparation. Since the normal state of most middle market companies is already busy, M&A asks for time and attention many owners don’t have or are unwilling to give.
4. Professional Advisor Issues
Owners of privately held middle market businesses need professional advice to enable wise selling decisions, but three things stand in the way of good counsel:
- Confidentiality/Privacy – Owners are fiercely protective of confidential business information. Great harm could come to the company if competitors, customers, employees, suppliers, or nearly anyone else learned owners were even thinking about a sale. Therefore, owners are very cautious and keep their private thoughts hidden even from trusted advisors like their attorney and/or CPA.
- Fealty to Non-specialists – M&A is a specialty within the practices of law, accounting, and taxation, and owners need advice from such experts. Unfortunately, owners resist such counsel due to loyalties with long-time trusted attorneys and/or CPAs. Unfortunately, attorneys and CPAs only tangentially acquainted with private capital marketplace practices are likely to offer damaging advice to owners without knowing it.
- Excessively Frugal – Few people appreciate the value of a buck more than business owners, and successful companies are never built from wasteful practices. Long embedded cash preservation habits often prevent owners from seeking specialized, professional M&A advice. Consequently, knowledgeable advisors are not given the opportunity to provide meaningful guidance. If done properly, businesses will spend more money on professional fees preparing for and ultimately selling the business than all past professional fees combined. Owners need to know what the business is worth, and business appraisers don’t devote dozens of hours and analysis for free. Owners need specialized M&A legal counsel, which means legal costs at the top of the rate structure. Owners need tax and other financial advice, and CPAs charge by the hour. Investment bankers/M&A brokers charge to lead the selling process. Wealth advisors extract fees to manage funds from sudden liquidity events.
5. Unfamiliarity with the Private Capital Marketplace
Most owners are not acquainted with the private capital marketplace, which is where most privately held middle market businesses will be sold. Owners don’t know who the right buyers might be or even the array of options available to them. Unfamiliarity causes some to believe only unsatisfactory options exist. Others have heard horror stories of private equity deals gone bad. In such cases, the decision to sell is simply no; but it is based on misinformation and wrong assumptions.
In college, students can sometimes get away with the failure to prepare by doing all-nighters and cramming for tests. But the lack of preparation in a business can’t be fixed quickly. It takes years. Therefore, transaction planning should begin years before the sale occurs. Owners who put off transaction preparation will always be at a disadvantage when it is time to sell, and destined for suboptimal outcomes.
7. Bad Thinking
Owners often form their understanding of transactions from sources who are not professional M&A advisors. Consequently, they can embrace an entire belief system that is totally wrong about business values, transaction processes, buyer characteristics, and so on.
8. Unwarranted Self-Confidence
Owners are used to being in control. They are the ones others look to for decisions. Years at the helm sometimes promote excessive levels of self-assurance that can be counterproductive in M&A transactions. In most cases, buyers of privately held middle market businesses acquire companies for a living. They are highly professional. In most cases, sellers may have never sold a business before. When professionals get into the arena with amateurs, the result is highly predictable. For amateurs with excessive self-confidence, the outcomes can be even more one-sided in the buyer’s favor. Therefore, owners would be wise to set the hubris aside, and humbly accept capable advice from professional advisors who are there to protect the owner’s interests.
While selling decisions are difficult, they must be made. Transition planning is a foundational duty of ownership. The day ownership transitions will arrive whether owners want it or not. Time respects no one. Those who fail to plan will inevitably become passive/reactive sellers doomed for suboptimal outcomes. Worse yet are those who die or are otherwise incapacitated while still in ownership. Such circumstances rarely deliver favorable results for those left behind. Employees, customers, suppliers, and even whole communities depend on the entity’s long-term survival. Therefore, business owners cannot shrink from proactively planning to transition from ownership no matter how difficult or uncomfortable the process may be.
Blue River Financial Group is committed to educating middle market business owners about the complex process of selling a business, so they can make informed decisions and achieve regret-free outcomes. If you are a business owner seeking guidance, give us a call @ 248.309.3730 to speak with a professional M&A Advisor, or reach out online.
William “Bill” Loftis is Managing Partner and co-founder of Blue River. Mr. Loftis developed a passion for M&A as a transaction principal, and has assisted buy and sell-side clients through the M&A process in multiple industries. He earned a B.A. in Business Administration from Alma College and a Master of Science in Finance from Colorado State University. Bill’s full bio is available here.
About Blue River
Blue River has been representing middle market business owners and professional acquirers through the merger and acquisition process for nearly two decades. We understand transaction values from the theoretical and practical levels like few others. Since transactions depend on funding, we blend traditional appraisal methods with advanced modeling used by banks and professional investors to support our opinions. Our findings are supported by internal and external industry transaction databases, original research, and experience.
If you plan to sell all or a portion of your company in the near term or over the next 5 to 10 years, transaction value will likely be among the most important decision variables. The sooner you understand how key internal and external drivers affect value, the more time you will have to strategically influence outcomes. Contact us to schedule an appointment with one of our Certified Valuation Analysts.