The three most common mistakes in preparing to sell your company
Record Point is an independent corporate advisory firm with operations in Sydney and San Francisco. We specialise in domestic and cross-border advisory services for public and private companies including mergers and acquisitions, capital raisings, corporate partnerships, debt advisory, restructuring, strategic reviews and valuations.
Welcome to the first Record Point website blog. Going forward, we will be sharing our thoughts on topics which we think are relevant to anyone with an interest in the world of Mergers & Acquisitions. Whether you are a founder, shareholder, investor, manager or adviser, we hope that you will find these posts interesting and informative.
In Australia, there are about 2,200 listed companies, many of which get a lot of news and attention, however there are more than 2.7 million registered companies (and growing every month), the overwhelming majority of which are privately owned. While not all of these are operating businesses, it is nevertheless a surprisingly large number for a country with a population of only c.25 million.
Each one of these businesses has its own story. Inevitably a considerable amount of sweat and tears was invested by its founders and early employees to establish the business by finding and developing relevant products or services, implementing processes and controls, finding customers, generating revenue, watching expenses and dealing with a wide range of daily challenges. With the challenges comes reward for those who find a successful formula. Besides becoming a source of employment and income, being part of a successful and growing business can be an opportunity to create considerable value along the way.
While there are a large number of ways to create value, there are a limited number of ways to realise that value. Most founders, shareholders and managers have little experience with this, and they should carefully consider whether it makes sense for them to appoint an adviser that they trust to guide them through the process. Selling a business might well be the single most important financial transaction for a founder, and to mitigate what might otherwise be a highly stressful period, any self-respecting advisor will work with the company and its key stakeholders to ensure they are well prepared before initiating any sale process or engaging with potential acquirors or investors.
This post highlights three common mistakes we see with founders and companies preparing for a sale.
- Starting too late
The phone rings. It is one of your international competitors who states that they have been tracking your business for some time and admire what you have achieved in growing your business to where it is today. They are keen to send a team to Australia for discussion about purchasing your business, doing some due diligence and by the way, they are willing to pay top dollar if you engage with them quickly.
- Option 1: You call your lawyer who provides you with a Non-Disclosure Agreement to have the other party execute and you scramble to compile as much information as quickly as possible. The due diligence team comes on-site to learn about your business and inspect the “books”. They learn that the business does not produce monthly financial reports which are suitable for its due diligence, has not finalised two years of its annual financial statements, does not have considered financial forecasts, many of its key customer and supplier agreements cannot be located and its lease agreement was due to be renewed 3 months ago. They decide to return back home empty-handed.
- Option 2: You and your team have been preparing for this moment for a long time and have invested to maintain the company in a state of “sale readiness”. You have a virtual dataroom ready-to-go which contains all the company’s up-to-date financial information (which has been vetted by external advisors for due diligence) and all the key legal contracts are signed and on-file. Having signed the Non-Disclosure Agreement, you provide the due diligence team with access to the information that it is suitable for them to see, and they like what they see! The information is organised, relevant, consistent, well presented and accessible. Two months later, you sign a Sale and Purchase Agreement for more money than you ever dreamed of.
- We like option 2. Yet surprisingly and frequently, company owners, focused on running and growing their businesses, do not make the necessary up-front investment to be prepared and ready for a potential sale.
- Taking the process in-house
A company could incur thousands of dollars by directing internal resources and involving external advisors in order to be prepared for a future sale process. While it might be tempting to take the process in-house, in most instances it becomes a side-lined project which finds its way to the bottom end of a long business-as-usual to-do list. We strongly believe that investing upfront in obtaining great advice and support to be prepared for a future value realisation event will yield a strong return in the future.
- Not considering the impact on other stakeholders
It is easy to get caught up in the process and to forget that there are numerous stakeholders who are crucial to the ongoing success of any company. Shareholders, boards, management, employees, suppliers, customers and landlords are the obvious ones that are applicable for most companies and there might be others. It is important to remember that a sale process impacts on more than just the founders and shareholders. Preparing a communications plan and having a stakeholder engagement strategy in place could go a long way to avoiding unexpected and potentially value-destructive reactions from unsuspecting stakeholders in the midst of a sale process.
If you would like to discuss how best to go about preparing your business for sale, please get in touch with any of the Record Point team.
For more information
Record Point is an independent corporate advisory firm located in Sydney, Australia and San Francisco, United States. Our team of professionals serves public and private companies across numerous sectors with a particular focus on healthcare, technology, consumer and industrials. Our team has more than 50 years of experience successfully leading and executing in excess of A$30 billion in transactions. Contact us to discuss your next strategic move on +61 2 9078 8250.
August 29th, 2019