If you’re considering selling your business, congratulations. You’re about to accomplish something few people do. But before you fantasize about payouts and life after acquisition, put your assumptions about the process on ice until you’ve read this blog. Why?
Most founders I speak to enter the acquisition process dizzy with misleading information. Most of these “facts” are just plain wrong. That might not sound like a big deal if you hire an advisor or intend to learn as you go, but harboring such misconceptions could thwart your deal.
Self-check against these six common acquisition misconceptions before listing your business for sale. This will help you prepare for acquisition and keep your feet firmly on the ground. The process can be a rollercoaster – and you don’t want false expectations to throw you off.
Prefer to watch or listen? Take 10 minutes to sit back with a coffee as Shawn explains away the most common acquisition misconceptions in the video below.
1. Acquisitions Happen Quickly
The first acquisition misconception is that the process is quick. It can be, but it’ll be longer than you think. I’ve spoken to some founders who think they can sell overnight. In reality, a formal acquisition process might take six to nine months, maybe more, until the deal closes.
To start, you have to prepare and package your company for sale. What are your value drivers? How can you summarize them in a way that gets buyers interested? You must prepare marketing material like a pitch deck or CIM that entices buyers to the negotiation table.
How will you market your business? Are you sending the opportunity to buyers as well as listing on Acquire.com? This all takes time. How many emails will you send and receive? How many buyers will be interested in your business? How many questions will they ask?
If 50 buyers request access to your startup, you’ll have 50 conversations. Some will be short, others long, but you’ve got to whittle down that funnel. You’re narrowing down from an enormous buyer pool to a shortlist of the best candidates. Then you negotiate with those final few buyers to get to the right one for your deal.
Although it’s technically possible to sell a business in a day, doing so increases the risk on both sides. Due diligence alone can take several weeks or months to do properly. Your buyer will need to lift the hood on your business to inspect the engine and moving parts before they sign an APA and wire you the money (wouldn’t you?). That usually can’t happen overnight.
Not to mention you probably want to evaluate the buyer before you reveal too much private information. For example, you’ll at least want to verify that they have the money before spending months and showing them everything about your company, right?
Think of everything I’ve mentioned above. You’ve evaluated your company, packaged it, marketed it, talked to potential buyers, and then negotiated your shortlist down to a single buyer. Now you’re in due diligence. Depending on the size and complexity of your acquisition, that usually can’t be done over a weekend, so prepare for a longer process.
2. Finding a Buyer Is the Same as Closing
The second misconception is that once you find a buyer, the deal is done. That couldn’t be further from the truth. Finding a buyer puts you on the ten-yard line of a 100-yard football field. You might think you’re almost at the touchdown area, but you can’t even get a field goal. There are so many steps to go through after finding a buyer, from due diligence to transition services.
For example, a buyer might change their mind about acquiring your business. Maybe their expected financing or investment funds didn’t come through or had to be deployed elsewhere.
Maybe interest rates have changed. Outside influences over which you have no control regularly derail acquisition – you can’t drop your guard until the deal has closed.
Due diligence might also raise red flags. During market, HR, legal, financial, or any other part of due diligence, the buyer can say the acquisition no longer meets their risk appetite. Maybe you can counter, maybe not, but remember you’re at the beginning of the process, that first date in courtship, with a long way to go before marriage.
3. Dealmaking Must Be Hostile
The third misconception is that dealmaking is always hostile. Many people’s first experience of M&A is what they see in the movies: one team and another yelling at each other over the negotiation table. It’s entertaining, sure, but not how most deals happen in the real world.
Acquisitions can be pretty friendly. Maybe you want to retire, start a new venture, or pass your business to someone who can grow it. Maybe the buyer wants your technology, people, customers, or revenue. You both benefit, so doesn’t it make sense to work together?
No one serious about closing will bang the desk and make demands of you. If someone invites you over for dinner, do you open the door and start yelling? No, you take off your shoes, sit down and have a conversation. It’s about building a relationship. Sure, there’ll be some peaks and valleys, but that’s the same for all conversations in life.
Who has a perfect relationship with their significant other? You have some great times and some bad times, but as long as you’re honest and communicate, you can overcome most challenges. Maybe all you need is to take a walk or a night to think things over.
4. You Know What Your Buyer Wants
The fourth misconception is that you know what the buyer wants. If you ask them, they might answer truthfully, but chances are it won’t be the whole story. You can’t read their mind, and you might never know the full breadth of their intentions. And those intentions can change at any point during the acquisition due to factors beyond your control.
Why emphasize revenue, EBITDA, or some other metric if the buyer is interested in something else? For example, maybe you think you offer the best technology or amazing growth. While they might be attractive qualities in a business, you won’t know what the buyer wants until you’ve asked them. Are they looking to expand into new territory? Do they want contracts with key vendors or purchasers? Do they want your staff?
To assume from day one you know what your ideal buyer wants puts you in a bad situation. But if you remain open, think critically, and ask questions, you could leverage what you learn to your advantage. Maybe you discover something about your business that would boost the buyer’s revenue by X percent. That alone might justify a higher asking price.
5. Due Diligence Is Only Financial
Misconception number five is that due diligence is only about your financials. Many founders believe due diligence is only verifying and validating the P&L, balance sheet, and cash flow. Actually, due diligence covers every aspect of your company from legal to operations.
Some companies might need environmental due diligence, for example. Others might need IT or cybersecurity due diligence. Most will look at your people, contracts, org charts, and more. They might also do market due diligence and get a quality of earnings report done. Due diligence can be very complex, so it’s not a matter of just handing over your financials.
That’s why you’ll sometimes hear of companies undergoing due diligence for 60, 90, or 120 days. That’s more common on bigger transactions, but you get the picture. These are active processes where buyers (and sometimes sellers) spend enormous amounts of money with third parties to do due diligence right. Buyers want to ensure they’re getting what they want and that there’s no liability afterward or some nasty surprise awaiting them post-closing.
6. The Deal Is Done When It Closes
The final misconception is that the deal is done when it closes. It’s easy to assume that once you’ve transferred the acquisition assets and received your funds, nothing else happens, and you simply move on with your life. That’s seldom the case, however.
It depends on the deal, but some terms obligate you to do things after closing. Maybe there’s an earnout component where you’re staying on with the business to help them hit performance milestones that fatten your payout. You might be there for one, two, or even three years. It’s all part of the negotiation process – you might even want to stay indefinitely.
Even if you plan for a clean break, you’re still on the hook for reps and warranties. Will something you presented during the acquisition backfire after the deal closes? It could be six months until it happens, maybe a year, and then something surfaces that could threaten your milestone payments and embroil you in a debate with the buyer to resolve the issue.
Remember that your closing day is just one touchdown in the game, but it’s only halftime and you still have two more quarters to play.
Selling your first business is as stressful as any other major life event. But the payoff can be huge. Even small acquisitions are worth celebrating. Just don’t get fooled into thinking you know how the process will play out until you’ve done your research and preparation first.
The content on this site is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before entering into any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional.
