Success factors for completing a business sale
Every business sale involves both opportunities and hazards. However, typical behaviors have emerged that characterize a successful business sale.
1. Clarity in defining the goals of the transaction
Defining the goals of a sale requires a specific strategy that can be carried out
in a specific time span. Key questions must be answered in advance if the deal
is not to become bogged right from the outset.
- Is 100% of the company to be sold and are existing shareholders to be removed
- Is a strategic partner considered that will secure the future of the company and new sales markets?
- What type of buyers come in for consideration at all for the offering company?
During the definition phase, all parties involved are held to the strictest
conditions of confidentiality. The group of advisors should be circumscribed. If
the industry catches wind of a rumored sale, customers, vendors, competitors
and, unfortunately, the company’s own workforce will often react
2. Realistic asking price
Purchase prices for unlisted SMEs fluctuate as much as stock prices do.
Unrealistic asking prices spell the ‘death’ of any transaction. With this in
mind, an own company valuation should always be future-oriented and based on
valuations of comparable firms. Valuations based on past transactions can also
offer suggestions of a company’s value. The purchase price is ultimately decided
by supply and demand. The most important task is to find the best possible
transaction for the entrepreneur. In this case, ‘best possible’ does not
necessarily always mean obtaining the maximum purchase price, as other factors
are equally relevant. Among other things, these factors include the nature of
the sale (share deal/asset deal), job guarantees for employees and a temporary
consulting contract for the entrepreneur to ensure a smooth transition and
compliance with promised investments or risk limitation in the case of
3. Avoiding emotional entanglements between the negotiating parties
Throughout the sale process, emotional reactions on the part of the negotiating
parties may jeopardize the success of a transaction. For this reason, use of an
expert M&A team with many years of experience is recommended. The team’s
mission is to maintain objective argumentation or, if need be, to advocate for
4. Professional project and time management
The time required for the entire purchase or sale process is frequently
underestimated. Without professional project management and a defined timeline,
one can quickly lose control of the process; in the worst case, the project can
become stuck. In order to avoid this, it is best to follow the usual rules. In
other words: Before the company goes to “market,” it must make a variety of
preparations. It is helpful to draw up a meaningful information memorandum for
potential buyers and investors. Professional buyers insist on plausible and
detailed planning as well as concrete answers to ambiguities. The time between
the first approach and realization of the transaction is also a function of
whether the parties involved are financial investors or strategic buyers, and
whether or not they come from the same or a related sector. Additional waits due
to extraneous factors can delay the transaction.
5. Focus on multiple potential buyers
The selection of the ideal buyer requires careful analysis of all potential prospects and their market setting. Example: A difficult market initially involves a whole series of initial contacts. These must be assessed, step by step. It is not uncommon to have 100 contacts result in only 15 that are left standing and merit presentation to management. Following the presentation, subsequent process steps (Letter of Intent/due diligence/impairment tests, etc.) winnow out the remaining prospective buyers until the ideal buyer emerges at the end of this process. A positive side-effect of such activity is that it usually helps generate higher selling prices.
6. Flawless control of information
Due diligence constitutes the crossroads of a company sale/purchase. This is the
phase during which the prospective buyer thoroughly examines the target company.
Here, a data room is usually prepared where all of the company’s relevant
documents can be offered for review. The better a data room is prepared,
including disclosure of possible “skeletons in the attic,” the fewer surprises
there will be during contract negotiations, and the more effectively warranties
and guarantees can be discussed. The seller often makes the mistake of
disseminating information about the company offered for sale too quickly and too
broadly. If a sell-side mandate is granted to an experienced M&A advisory
firm, all data are time-released, often with disclosure coming only in a second
due diligence round, and even then, only if the potential buyer is truly
interested. For companies with the legal form of the stock corporation (AG), in
case of doubt a legal adviser should be consulted, since this step may pose
conflicts of interest for board members. On the one hand, the board is
responsible for the well-being of the corporation; on the other, the transaction
must not be hampered by information behavior that is excessively
7. Realistic forecasts
The natural strategy of the seller or M&A advisor is: arouse the buyer’s
interest in the property and convince the buyer of the wisdom of the investment.
A company sale is thus inconceivable in the absence of a reliable sales exposé
and comprehensible planning. A common mistake in M&A is what is referred to
as “hockey-stick planning.” Here, in the euphoria of preparing for sale,
assumptions are made that are no longer in line with the past trends. An average
company suddenly becomes a company with extraordinary growth. This tends to
frighten off potential investors. Experienced M&A advisors are aware of this
momentum and, working together with the entrepreneur and its tax consultants,
work to prevent unrealistic forecasts of future performance.
8. Successful timing
A transaction can also fail due to bad timing. The ideal positioning of the
target company is based on the logistics principle: the right time in the right
place and in the right quantity. Inclusion of industry cycles and current issues
in planning a sales transaction is absolutely imperative. This means that the
seller should, if necessary, wait for a high-performing quarter. However, one
rule applies from the time of the first contact with potential buyers: speed.
Ideally, the interested parties approached can be led through the transaction
process on a tight schedule.
9. Continuing business operations
As important as a solid, well-thought-out organization as a framework condition
for the transaction may be, the entrepreneur should nevertheless never neglect
its day-to-day business operations. Coordination and facilitating by a third
party can help relieve management and offer the entrepreneur the necessary time
to focus on business operations.
10. Confidential involvement of the management
More than anything else, for employees a company sale means a step into an uncertain future. Experienced M&A advisors avoid hasty and negative information, as long as no facts have been created on the ground. As a rule, staff members are not informed until an effective purchase agreement has been concluded. In larger companies, however, a core management must be formed and tasked with providing support during preparations to the transaction and subject to strict secrecy.
For the entrepreneur, the success of a transaction does not consist in
consideration of the ten factors of success in M&A alone. Above all else, this
success consists in coordinated handling of all possible hazards. A lack of time and
lack of experience do the rest. This is where experienced M&A advisors can help.
They are familiar with possible types of transactions and structures and their
dangers, and they have a command of the customary valuation methods. Their
negotiation experience can help de-emotionalize the process as they accompany the
entrepreneur as an objective third party. Another advantage is the direct access to
strategic buyers in the industry, and to reliable financial investors. Positive
side-effect: The demands on management’s time are relieved throughout the process.
Experienced M&A advisors provide the strategy for success. Success fees
certainly promote dedication, but solid M&A advisory firms are also
characterized by the fact that they advise against unfavorable transactions in the
interest of the client. A successful transaction is always the result of
implementation of error-avoidance strategies and structured, experienced execution
of buy-side and sell-side processes.