By Scott Bushkie, CBI, M&AMI
We have a saying at Cornerstone: “Go ugly early.” When you’re selling a business, it’s best to put any trouble issues on the table right away. Whether you’ve just lost a customer, your backlog isn’t what it was, or you’re operating at capacity—whatever the issue, be up front.
Providing clarity around your business flaws serves two purposes. First, it makes the whole deal process more efficient. If customer concentration is a no-go issue for a buyer, let’s flush them out early before we’ve invested any time or money.
Transparency also brings credibility, establishing you and your advisors as honest, ethical people. That goodwill can go a long way in negotiations.
Plus, I think there’s a psychological benefit to going ugly early. Buyers are the most excited and rational early in the deal process. This is the stage when they’re most likely to respond to issues with a shrug and a “we can deal with that” attitude.
Later on, when the excitement has worn off and everyone is dealing with tedious details, negotiations, and financing matters, that’s when problems can become…problems. Buyers who uncover issue areas later in due diligence are more likely to respond with price adjustments and greater scrutiny.
Once your credibility is damaged, buyers feel the need to dig deeper and double or triple check your numbers. It slows down the process, sours relationships, and can often kill the deal.
Credibility is a particular value to many of our boomer clients who are looking to sell just part of their company. They’re selling the majority of the business, but retaining 20 percent to 40 percent equity, with the goal of reselling the company five years, plus or minus, down the road.
These owners are taking advantage of the strong values in today’s market and diversifying their risk by cashing out some business value now. Then down the road, using their new partner’s resources and synergies, they’ll get a second bite at the apple with potentially even higher return.
This is a popular deal structure for private equity group buyers who want to retain key leadership and turn over their investment with a short-term, planned exit strategy. As you can easily imagine, they don’t want to be partnering with someone they’re second guessing.
I’ve worked with a seller who didn’t tell us they’d lost a customer contract. They were hoping the buyer wouldn’t find out, as their financials still weren’t showing much impact. But the information came out in due diligence and ultimately the deal fell apart.
So go ugly early. Your approach to buyers should be: “I know we’ve got some issues. If you can help with those, great. If not, next.”
Big problems make it tougher to get a deal done, but trying to hide those issues makes it worse. Transparent and forthright—it’s your best chance of maximizing value and getting your company sold.