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.

Share this in your network

Industry Watch
Fuel additives are fuel-soluble chemicals added in small quantities to enhance the properties of the fuel, improve fuel handling and fuel performance. The rapidly increasing demand for hydrocarbon fuels from transportation and power industries have
Facility Management (FM) refers to the use of a third-party service providers to maintain a part or entire building facility in a professional manner. It is increasingly gaining popularity amongst commercial as well as residential clients driven by
Automobile industry facing a tough time as vehicle demand is sluggish. Valuations of companies on the lower end. Autocomponent industry is also expected to witness a flat growth this fiscal because of weak automobile demand. The industry will remain
Fitness industry in India is worth Rs.4,500 crore and is growing at 16-18% annually and is expected to cross Rs.7,000 crore by 2017. The industry is fragmented with majority of the market dominated by unorganized and independent gyms outlets. The
Low utilization rates and weak demand from realty and infrastructure sectors is driving consolidation in the Indian cement industry. More mergers & acquisitions are expected in the medium-to-long-term as valuations are attractive to buyers and
Demand for electronics hardware in India is projected to grow at 25% compared to only 15% growth in production, expected to create a demand supply gap of Rs.14.8 lakh crores by FY20. This creates a unique opportunity for electronics companies
The ecommerce space in India is still evolving and companies have limited history. Many of them function at negative operating cashflows and are dependent on investments from venture capital firms. Using traditional valuation methods like DCF
The food processing industry in India is getting a shot in the arm with increased focus from the governement and policy makers, higher involvement of scientists to help increase food processing productivity, and establishment of mega food parks
The Staffing Industry includes companies which list employment vacancies, place applicants in employment, supply temporary workforce and all other employment related services. Market size of the Indian staffing industry was INR 26,650 crore in 2014
Global acquisitions by Indian IT firms rising with a majority of the transactions happening in Europe and North America. Primary reasons driving these acquisitions are increasing local presence in the US and Europe, acquiring employees with a
Advertising spends in India are expected to grow 12.6% year on year to Rs 48,977 crore for the year 2015. The ad spend in 2014 was Rs. 43,490 crore, which reflected a 12.5% increase over 2013. Firms in the advertising industry prepare advertisements
The worldwide ERP software grew by 6.4% in 2014 to reach $27B market size. The segment is anticipated to garner $41 billion in sales by 2020 with a CAGR of 7.2% during 2014-2020. ERP software is second fastest growing segments within Enterprise
It is widely believed that India has not fully leveraged its strength in the Manufacturing sector in the last decade, but the sector is expected to emerge stronger in next decade as companies innovate and adopt new business models. To support this
Pharmaceutical industry seems to be entering a growth phase after a muted growth over the last few quarters. Valuations of pharma companies fairly high as they are expected to perform. Indian Pharmaceuticals industry is the world’s third largest in
The Indian restaurant industry is highly unorganized and fragmented but is getting rapidly organized with Quick Service Restaurant (QSR) segment leading the way. Private Equity and Venture Capital firms have shown increased interest in this sector
The salon industry in India is largely unorganized but is getting organized at a fast pace. The average per person spending on salons in India is a miniscule of spending in other countries such as the US, China and Malaysia. Even a small growth in
India is world’s second largest producer of textile and apparel after China. China is slowly reducing its focus on textiles and this has had a positive impact on the Indian textile and apparel industry. But not everything in the garden is rosy as