The SMERGERS Blog
  • 7 Common Mistakes by Business Owners seeking Sale/Investment

    Tue 20 Jan 2015

     

    If you’re a business owner with a great firm and are wondering why you aren’t able to attract buyers/investors, perhaps you’re committing some of these classic mistakes (with easy fixes) we’ve seen hundreds of businesses commit.

     

    Mistake #1: Revealing very little information about your business

    Fix: Answer the Five Fundamental Questions (at least!) 

     

    Investors will take less than a minute to look at your teaser/online profile and decide whether to proceed or not. It is therefore important to present an attractive, comprehensive view of your business to enable the investor to make an informed decision. At the same time, be careful about conveying too much of information. Unless specifically asked, you should stick to explaining your business and not the entire industry as most investors/buyers would have already researched this. While investors have varying individual criteria, make yourself investment-friendly by answering the Five Fundamental Questions in your profile/teaser:  

     

    1. What exactly is your business?

    2. How much money are you looking for?

    3. How much money are you making already?

    4. Why do you need the money?

    5. What does the buyer/investor get in return? 

     

    Hint: There is no need to reveal any confidential information. You should request the buyer/investor to sign a non-disclosure agreement before sharing confidential details.

     

    Mistake #2: Projecting unrealistic future growth

    Fix: Present pragmatic assessments and plans 

     

    Unrealistic goals and projections repel investors and make the business owners look inexperienced. We have seen businesses that project very high revenues compared to their previous revenues over dozens of years of operation.

    While it is good to have ambitious targets, you need to provide realistic, well-researched, and acceptable projections and plans to investors.

     

    Mistake #3: Expecting sky-high valuations

    Fix: Use online valuation tools and also talk to Valuation Experts 

     

    Potential for $100mn in revenue does not equal a valuation of $100mn. You may be intrigued by the valuations which young technology companies are commanding these days but the ground reality for established and stable businesses is different. Buyers/investors look to break-even their investment in 3-4 years, which means around 3-6 times EBITDA is generally an acceptable range. Too-high valuations are most common reason investors pass on opportunities.

    For a detailed overview of valuation, please read our primer. We also provide a free valuation tool to help you get a rough estimate of your valuation. Finally, be realistic about valuations and talk to a valuation expert for detailed analysis. 

     

    Mistake #4: Low responsiveness

    Fix: Be available, prompt and serious about the deal

     

    In a merger/acquisition, we have busy people on both sides of the table. When one of them is available, the other may not be and vice versa. This leads to delay. In such cases, it is important to have a good part of initial conversation over email and then have key conversations over phone, video call or face to face meetings. 

    We started SMERGERS to help you reduce the time needed to find interested buyers/investors, but when they are knocking on your door, you should take them seriously.

     

    Mistake #5: Not ready with key documents/information

    Fix: If you want a deal, keep all documents ready for it 

     

    To begin meaningful conversations, buyers/investors will need a few key documents such as a Teaser and an Information Memorandum to shortlist the opportunity. During due diligence process, buyers/investors will require additional documents such as Registration Certificates, Trade licenses, Financial statements, Projections/Targets, Valuation reports, Client contracts, etc.

    Making the investor wait for you to process these documents leads to decline in investor interest, concerns over your planning skills, and might result in a no-deal.

     

    Mistake #6: Appearing to be unprofessional

    Fix: Communicate effectively, validate trust, and respect your investor/buyer

     

    While interacting with investors/buyers, keep in mind that your behavior reflects greatly on your business. Displaying good communication skills with investors reflects positively on you and your ability to interact with your business’ stakeholders effectively. Make sure you perform a basic spelling and grammar check before hitting the send button.

    Being late for meetings, committing to some work and not keeping your word will make investors lose interest in you (and your business!). It is extremely important to be accountable while interacting with investors/buyers.

    We understand that you are an entrepreneur and have built a business all on your own, but you need to respect the buyer/investor. Instead of a generic ‘if you’re interested, call me’, being genuinely involved while interacting with buyers/investors will help you close the deal successfully. Even if you are the next Facebook, keep the ego aside and focus on building cordial relationships. It will payoff some way or the other.

     

    Mistake #7: Suspecting buyers/investors excessively

    Fix: Do a background check- and then stay positive!

     

    Business owners become over-protective of their business and start seeing every buyer as a potential competitor. While it’s important to conduct a background check of the buyer/investor and know who they are, having a positive attitude while speaking to them makes a difference. Business owners who believe that the buyer/investor they are speaking with is the one who will close the deal, are the ones who actually close the deal!

    We have seen many deals fail at the brink of being closed due to business owners committing these common mistakes, and we’d like you to be aware that getting these small things right leads to faster deal closures.A successful closure can be attributed to being practical and being proactive. Business owners should follow this religiously or appoint an expert advisor who will take care of the intricacies of the process from end to end.

     

    In a future post, we will explore common mistakes investors/buyers commit while interacting with business owners. If you have any thoughts or comments, we’d love to hear from you at vishal@smergers.com.

  • How to sell a running business?

    Thu 17 Aug 2017

    Different entrepreneurs have different motivations for starting and running a business. Some do it to escape the monotony of working for a corporate outfit, while others do it to pursue a passion. Whatever the reason an entrepreneur has for pursuing a business, eventually he/she would think of selling the business to realize its full potential. There are several reasons why one would want to sell the business. It could be retirement, absence of succession planning, no legal heir, mental fatigue for the entrepreneur or simply, to cash out for the right offer. In this article, we’ll explore different steps one has to take before putting up a running business for sale.

    It’s important for us to first understand what buyers of business look for while purchasing, to better understand what strategies need to be followed while building a business.

    What potential acquirers of a business look for -

     

    1. USP
      A unique selling proposition is very important to have for any business to find a buyer. What’s something special about your company that a buyer can’t find in other business? What’s your secret sauce?

    2. Strong, positive cash flows
      Selling a profitable venture in itself is a challenge, but selling a business which is running on a loss is possibly 10X as difficult. Buyers are sceptical when purchasing businesses which are bleeding money at a constant basis as they can’t be too sure how/when the business will become profitable.

    3. Moats
      A moat is essentially a reason why competitors can’t eat up your business i.e. a competitive advantage over other companies in the same industry. Buyers always want to reduce their risk when acquiring a company, and having strong moats around your businesses is critical to ensure a good sale.



    4. Less dependence on founder(s)
      While all businesses will have a lot of dependence on the founder, buyers are always concerned on the survival of a business post an acquisition, when the entrepreneur is not part of the company anymore. It’s important to ensure that the business can carry on, even in the absence of the founder(s)

    5. Regulatory compliance
      There’re too many instances of buyers of companies being hit with retrospective taxes and penalties due to non-compliance of regulatory processes in the past. These instances have made buyers vary and are particular that the business has to be completely compliant to all rules in the industry

    6. Company Culture
      Post a take-over, most companies struggle with conflicts of culture between new management/team with the employees in the business. Buyers look for businesses which have a ‘cultural fit’ with themselves

     

    Now that we’ve understood a few important aspects that buyers want, we can move onto strategies that could be followed before putting up your running business for sale

    1. Building moats and USPs
      A moat, as discussed earlier, is nothing but a competitive advantage over others in the same market. Possible moats could be a great recipe that has customers coming back for more (in the restaurant business), or well struck deals with suppliers to keep the price low for customers in retail businesses, or a great team which understands and executes in your market, or filing patents for processes/technology.
      It’s important for founders and management to really understand what possible moats could exist for the business before putting it up for sale.

    2. Cash positive businesses
      Drive the company towards profitability at all levels – By store, by business division/function, etc. While calculating profits, it’s also important to keep interest payments for capital, depreciation of assets and other factors in mind. Businesses with a high gross and operating margin are of particular interest to buyers (even if the net margins are currently low, as margins will increase once debts are paid back).

    3. Automation of processes and decisions
      When you are selling your running business, it’s important to ensure that it can grow (and flourish) without the hands-on involvement of the founder. Work towards automating all processes in your organization to an extent they don’t involve the founder at all.

      Another important automation that has to happen is that of decision making – Small businesses are structured such that the business owner is involved in all decisions (big or small). It’s important to put a structure in place which removes this dependency to make the business lucrative for buyers. Having a management layer between the operational elements and the business owner is critical. In general, it’s best to reduce the role of the business owner to 3 main functions –

      a) Raise the capital
      b) Hire people and take care of building a great culture
      c) Set the strategic direction and vision

      Anything outside of these functions should be offloaded to management.

    4. Adherence to regulatory formalities
      Work with a strong accounting and auditing teams to ensure that all regulatory procedures are updated periodically. Every formality from tax deductions to filing of board meetings have to be done regularly, which helps during the eventual sale of a company.

      Having a sound understanding of factors affecting the sale of your business will not only help you run your business successfully, but also make it a very attractive target for buyers looking for running businesses for sale. You can leverage platforms like SMERGERS to sell your running business.