Every week there’s another headline in the trade news about a company being bought or sold. It’s easy to assume that someone just had a huge payday and are on their way to a private island on their yacht.
Big, fat paydays rarely happen.
In small business, Merger & Acquisition activity is typically more about emotion than math. Negotiations are messy and valuations are lean. We hear about the success stories, but most of the time the results are disappointing.
If your small business is also your retirement plan, read on.
Fact and Fiction
Many of my consulting engagements begin when an Owner has a buy or sell opportunity. Every deal is unique (and that is not something I say lightly), but that doesn’t mean there aren’t similarities.
In our early conversations, I share some hard truths about selling (or buying) a business. If you are contemplating a transaction or if you are just suffering from M&A envy, here’s a few things you need to consider:
I Can Almost Guarantee This Won’t Happen
83% of all statistics are made up on the spot, but I can guarantee that 99.9% of all M&A conversations go nowhere. It’s probably one of the biggest – SQUIRREL! – time-wasters for small business owners.
Still, I can’t deny the romanticism.
When you do read an announcement, it’s a safe bet that the deal went through in spite of a lot of bumps along the way.
Most “Deals” Are Not Win-Win
I won’t go so far as to say there’s going to be a loser, but there is always a buyer and seller. The idea that the sale was a “merger” merely assuages the ego of the company that was purchased. When smaller US Air bought much larger American Airlines, that was labeled a merger. American was in bankruptcy; they had to make a deal.
One party is better positioned than the other and can walk away from the deal if they want to. That’s your winner.
Value is Arbitrarily Calculated
In small business, M&A activity is typically more about emotion than math. Yet the “deal” will be framed by Finance experts with indecipherable spreadsheets containing every possible financial contingency, tax loophole, and forecast model they can pile on.
They will tell you that value is almost absolute – give or take the cost of capital, adjusted earnings, discount rates, and a myriad of other significantly non-absolute criteria.
In the end, small businesses don’t sell based on the formulas. The formulas validate the purchase price, which is what the seller “feels” their company is worth.
We all know what happens when you negotiate with your heart.
In the rare circumstance of both parties getting what they want during negotiation, the deal can still die.
Both Parties Will Regret the Deal at Some Point
Seller’s regret is the most common downside to a small business sale. After all, this is your baby, your life and it was summed up in a dollar figure. That’s tough enough to reconcile before the buyer accidentally tells you their plans for after the sale.
“You can’t do that to my company!”
Sometime during negotiations or due diligence period, the buyer is going to see your business as a hot mess and start to believe that your past success was all dumb luck.
“This is held together by gaff tape!”
When the cracks start showing, the deal starts breaking. Once you begin looking for problems, you will find them.
The Secret is Preparation
In the heat of running a business, the last thing small business owners want to think about is a hypothetical business sale.
Entrepreneurs, on the other hand, will spend years creating value, installing management and infrastructure, and building a brand with one purpose in mind: Selling the business to generate capital to do something else.
Former owners will tell you they wish they had paid attention to their financials much sooner. Squeezing extra earnings out during a good year seemed unimportant at the time, but would have paid off in multiples later on.
Run your company like you want to sell it, then the choice to do so is all yours.