August 30, 2010

Classic Mistakes in Exit Strategy vol. 3: The “Do It Yourself” Method

By Eric Michaels, Senior Analyst, MergerTech Advisors

Independence is a wonderful thing.  Nothing gives you quite the same feeling of pride like accomplishing something yourself, but there is a prime difference between taking on a challenge and setting yourself up for a fall.

Hiring an M&A advisor is just like hiring an accountant or lawyer; you’re hiring an expert to take care of issues that require the attention of a specialist.  Even though someone else is responsible for these issues, they are still important to you and your business.

Think about all the energy you expend on a daily basis making sure that not only is the business operating smoothly, but it is also growing at an attractive rate.  Now imagine also being responsible for running the M&A process from start to finish all by yourself.  Suddenly, 24 hours is not enough time.  In addition to running your business, you must prepare your company for sale and run a time intensive process from while trying to maintain some semblance of confidentiality.

The experience of your advisor is key to the success of an M&A process.  A long history of pitching companies to buyers, negotiating purchase agreements, and building relationships with people who are specifically looking to engage in M&A transactions give the advisor a significant advantage in the process and gives business owners looking to exit a greater certainty to close a deal.

While multi-tasking is an important skill, running a business and simultaneously running an M&A process is time intensive and draining.  Beyond the steep learning curve of understanding the best way to market your company, splitting your attention between running the business and selling the business makes you less likely to be at your best at either.

Finally, when you do not have an intermediary running a process for you, you cannot effectively maintain any confidentiality.  Typically, an investment bank solicits pre-NDA interest in their clients’ companies without revealing their identity.  Once an NDA is in place, identities are disclosed.  How can you maintain confidentiality if you are representing yourself?  Ultimately, by running a process yourself, you will give away enough information that your company will be revealed as available for sale before any conversations actually begin.

As soon as a buyer knows that you are representing yourself in a strategic sale before even signing an NDA, they can assume that you absolutely need to sell your business in the near future.  Business owners who do not absolutely need to sell don’t go actively soliciting buyers.  This knowledge immediately devalues your business and negatively influences your negotiating position long before you even discuss purchase price.  Outsourcing your exit strategy to an experienced advisor not only protects your confidentiality, but also gives you the opportunity to maximize your valuation.

Regardless of whom you choose to represent you, it is important that you work with an advisor on planning your exit strategy and having a 3rd party advocate run a process on your behalf.