Good entrepreneurs are good for a reason: They work hard, hire skilled people, coddle their customers and keep their heads down to help their businesses continue to buzz.
But when it comes time to sell their companies, many small and mid-size owners don’t grasp the process. They don’t know how to value their company correctly, prepare for a sale, attract the right buyer–or negotiate. Many also don’t have a good handle on the overall market in which they operate. Dealmakers have some tips for potential sellers.
So sellers–especially those who don’t engage an experienced M&A advisor–can watch years of hard work crumble if they don’t recognize their blind spots pre-deal.
“M&A transactions are relentless,” says John Ferrara, founder and president of Capstone Partners, an investment bank headquartered in Boston. “From the time they start to the time they close, it’s a full-time job and there are seller blind spots everywhere.”
John Ferrara, Capstone Partners
Ferrara has been on both sides of the bargaining table. In June 2022, Capstone was sold to Huntington Bancshares Inc., a regional bank holding company based in Ohio. Ferrara says despite his expertise in the field, he still hired an investment banker, tax advisor and estate planner to help complete the deal.
Sellers have blind spots for two primary reasons: Many are busy running their businesses and aren’t thinking about an exit or what drives value. But mostly, they have never sold a company and don’t know much about M&A. “Unless you do this for a living, you don’t understand this stuff,” says Joseph Durnford, CEO of investment bank JD Ford & Co.
“Statistically, about 70 percent of lower middle-market business transactions are done without a business advisor,” Durnford says. “The do–it–yourselfers make a lot of mistakes and leave a lot of money on the table.” Durnford has completed more than 150 middle–market M&A transactions in his career, working primarily with founder– and family–owned companies.
Owners are often unaware of “how to market their businesses, what information to share, when to share it and how to share it,” says Austin Hammer, vice president of Software Equity Group, a San Diego-area M&A advisory firm focused on helping B2B software companies. They also rely on irrelevant information that can negatively impact their decision making.
Beware of Blind Spots
Numerous blind spots plague sellers, year after year. Here are the most common mistakes owners make.
No exit plan: Many business owners don’t think about selling until it’s almost too late. “An owner shouldn’t wait until they are walking on a cane or in a wheelchair and just totally burned out before selling,” says Robert Scarlata, the founder and senior managing director of WhiteHorse Partners, an M&A advisory firm in Nashville, and author of Manage to Sell Your Business: Wealth Creation Secrets of the Pros. Instead, they should think about selling at all times during their careers, and prepare their businesses accordingly.
Reuven Itelman was 81 years old when he decided to sell his San Francisco-based family business, Herco Jewelry Company, to be closer to family. Durnford advised him on the sale to Quality Gold Inc., in January 2023. Quality Gold wanted information that Itelman did not readily have, which left Itelman scrambling to respond during the rigorous due diligence process, he says. After a grueling and extended preparation and sale process, Itelman and his family were pleased with the outcome. “I did not plan,” Itelman admits. “I only started to think about it a few years ago.”
Failure to define the desired outcome: Many sellers also neglect to outline their ideal transaction and end result, states Ferrara. They need to ask: “What are the top 10 qualities of a potential suitor? What kind of autonomy are you looking for in a transaction? What do you want your role to be?” he says. “Set up a grading system and stick to it.”
Messy books: Many companies don’t have proper accounting records or succession management plans and “have no idea what they are getting themselves into when they decide to sell a business,” Durnford says. Roughly 90 percent of owners lack estate planning, notes Ferrara. “We will not take companies to market if they are not prepared to go to market,” he says.
Sellers should authorize a quality of earnings report and present clean books to potential buyers. And if possible, books should adhere to Generally Accepted Accounting Principles (GAAP). “By having GAAP-based financials, it increases the probability that the buyer won’t run into unexpected results,” Scarlata says. A quality of earnings report also “eases the burden of the due diligence process and shortens the time period [of the deal] as well,” Hammer says.
Sellers should provide a “crisp” view of their company, backing this up with data, states Bret Kidd, the former CEO of Electronic Transaction Consultants LLC, a software and services provider of electronic tolling technology that was acquired in 2020 by Align Capital Partners. One year later, Align sold ETC to intelligent transportation company Quarterhill Inc. “Honing the message is really important,” Kidd says.
No growth strategy: PE buyers want to make a lucrative financial return over a several-year period, so they focus on hard-hitting growth. They look for acquisition opportunities and geographic and product line expansions. But often, business owners don’t outline growth strategies. “Private equity firms really want to know: If you’re unburdened by the capital constraint and unburdened by risk, how would you really grow the business?” says Dave Eichenlaub, co-founder and managing director of Confluence Advisors LLC, an investment bank in Wexford, Pa.
“Buyers are not only buying what the business owner is currently doing, but what the business can do the day after closing,” echoes Scarlata.
Customer concentration: Some companies service only a handful of customers, which can detract suitors. Buyers “don’t want one or two customers to account for a significant portion of the revenue of the business,” notes Eichenlaub. “That’s common and that’s a red flag.” Scarlata says about 25 percent of his clients have an unhealthy customer concentration. In these cases, his firm must try to find a buyer that already has many other customers.
Shallow management team: Founders can be reluctant to delegate responsibilities to others in-house. But companies with a deep management bench attract buyers. “Reducing the reliance on one or a handful of individuals is going to increase the value of your company,” Eichenlaub says. In addition, all shareholders must be aligned before going into a sale process.
Going in alone: “My over-arching seller blind spot are the business owners who decided to do it themselves,” Ferrara says. “Business owners need an experienced, trusted Sherpa to advise them around hazards they might not even know exist.”
Sellers should get referrals, ask potential advisors about their performance and close rates and choose advisors who are familiar with their particular industry, Kidd says.
“Most of the time buyers prefer that sellers do not engage with advisors, generally because they are trying to pay a lower price,” summarizes Eichenlaub. “But we’ve found that selling price values increased by 30 percent or more through a well-organized sales process.”
Getting sidetracked: Executives can easily get distracted from their company’s operations in the midst of a transaction, a huge blind spot that can derail a deal.
“The number one reason why deals don’t close is business performance suffers or sputters,” notes Ferrara. “Running the business and maintaining growth and profitability has to be the priority during the M&A process–or it will impact the transaction.”
Not ready for change: Sellers’ final blind spot is their steadfast belief that they are prepared for life post-deal.
“Business owners are used to calling the shots and making their own decisions and they need to understand that things will change,” Ferrara says. “So embrace the change, roll with the change and try to see how change is good for the long-term success of the business.”
