Eliminating Exit Planning Deal Killers
Last week’s blog covered common business owner “villains,” described as those misperceptions that owners have about the importance of Exit Planning. These villains take shape in many ways, internal and external, ultimately hindering an advisor’s ability to move forward with an Exit Planning engagement.
Similarly, there are misconceptions that carry weight after the initial conversation when an owner has decided on a third-party sale and is looking to begin the sale process. BEI Founder John Brown coined the term, “Deal Killers,” to describe those conditions and beliefs that, if undetected and unresolved before the sale to a third party begins, will kill a deal.
Unless you’ve jumped into the Exit Planning Process with a business owner, it makes little sense to jump into the business sale process. The opportunity for the greatest influence on maximizing sale proceeds occurs before taking a business to market.
After all, the most significant factor that impacts a business owner’s ability to leave their company is creating a company with transferable business value. While working to increase business value, it is wise for the business owner to work towards eliminating or limiting the Deal Killers before the sale process begins.
Describing the Deal Killers
Many owners are plagued with Deal Killers because they have not started the Exit Planning Process. As review, the Exit Planning Process through the lens of what would hinder a deal, includes:
- An accurate understanding of goals and aspirations post-exit
- Objectively determining the value of the business and other associated assets
- Determining the size of the gap between existing resources and those needed to achieve financial independence
There are several Deal Killers that, once the business sale process begins, live up to their name. The following can and will destroy a business owner’s ability to sell their company:
1. The belief that the business owner can sell their business today for enough money to satisfy their financial independence needs and wants.
2. The failure to reconcile their need for value with the market’s perspective of value before going to market.
3. An exclusive focus on top-line sale price.
It is likely that unless there has been significant work to increase transferable business value, the owner will not get what they need or want to maintain the post-exit lifestyle they desire. As is true for the above three Deal Killers, the Exit Planning Advisor is equipped with the necessary resources to assist with finding qualified transaction intermediaries who can provide price estimates and advisors who can calculate the amount of taxes and investment capital necessary to produce the desired post-exit income for the owner.
You also likely have experience or know other advisors with experience in the M&A market who have their finger on the pulse of market trends based on industry. Knowing the likely sale price and all the costs that accompany the sale helps eliminate these owner misconceptions, as well as being able to understand how buyers might perceive the value of the business.
4. The failure to preserve a company’s most valuable asset.
Retaining key employees and customers is crucial during a transition period. Exit Planning Advisors must work with owners to ensure a smooth transfer is promoted with the appropriate plans (Non-Qualified Deferred Compensation Plans, Stay Bonus Plans, etc.) in place so as to not lose the elements that made the company valuable in the first place.
5. The belief that the business owner can negotiate alone.
Buyers are the ones who are ultimately in control of the sale process. The use of highly trained deal professionals helps to level the playing field. As Exit Planning Advisors, it is important to help owners be wary of buyer pressures and enter the sale process with people who know the numbers and can help negotiate.
6. An unwillingness to recruit the best possible players for the deal team.
Business buyers have top-of-the-line accounting, legal, deal, and tax advisors. Using only a business owner’s existing advisors can sometimes put them at a disadvantage. Experience plays a role in the design, negotiation, and implementation of a deal. It is wise to build the Deal Team long before going to market to allow for enough time to determine an accurate asset gap, understand the fees that will arise, spot the areas of concern for potential buyers, and correct the deficiencies beforehand.
7. The belief that owner-initiated pre-sale due diligence isn’t worth the time, effort, or cost.
There is a difference between pre-sale planning and buyer’s due diligence that they will conduct as part of the sale process. While many owners wait until a letter of intent is signed, likely for time and cost reasons, it is advised to do so before even going to market. If an owner has engaged in Exit Planning and the estimated price and deal terms are satisfactory, the time and effort of pre-sale due diligence will only enhance the probability of closing.
8. Seller remorse.
Simply put, if the business owner is conflicted between staying and leaving, it is not the right time to go to market. Without considering the desired post-exit life, emotionally detaching from the company, or aren’t prepared to have their business scrutinized, business owners may crumble under the pressure of a third-party sale process.
It’s important as the Exit Planning Advisor to be sure the owner is really mapping out the life they want and need post-exit and asking the right questions that will excite the owner about their next step.
Eliminating the Deal Killers
Introducing your business owner clients to the most common Deal Killers and providing insights on how to eliminate them is an important element of the Exit Planning Process, especially since many could take months or years to phase out. In putting in the work to eliminate and address Deal Killers, business owners increase the probability of a third-party sale that works in their favor and aligns with their goals. The positive consequences for business owners of canceling the Deal Killers are:
- Expectations are more in line with reality.
- They have a preview of how effective the Advisor Team is before they are working on the logistics of the actual sale.
- The amount of time it takes to close the transaction decreases.
- The buyer’s risk is minimized, which also reduces the amount of offers.
The root of many of the aforementioned Deal Killers lie in the business owner’s misconceptions and therefore it is up to you to encourage and motivate them to get rid of them. However, with the right knowledge and support, and with their financial and personal interests on the line, it is likely that owners will find benefit in working with you to eliminate these Deal Killers.
All eight Deal Killers listed in this article share a common cause: a failure to engage in Exit Planning. While other exit paths allow owners to begin transferring ownership before the owner actually exits, a third-party sale does not. The likelihood of a successful sale depends less on the condition of the mergers and acquisitions market or deal process itself as it does on the actions an owner takes today… before entering the market.
To explore more Exit Planning content that will help you get business owners to act, start with diving deeper into:
- Free, Exit Planning educational webinar
- The Why We Plan podcast
- Content shared on BEI social media
- A conversation with the BEI Team – schedule a meeting!