Don’t Let a Sale Process Get in the Way of Business

At a recent Vistage breakfast, a CEO asked a simple question: “If I’m in the process of selling my business and a big but unprofitable customer comes my way that I normally would not take, but which might bump my valuation, what should I do?”

My advice was simple: run your business as if the deal won’t happen, because most deals don’t.

That’s the truth as I saw it as an investment banker at Jefferies/Broadview. It is reflected in data by Sutton Place Strategies that says that only 25% to 30% of companies brought to market end up in a successful transaction.

So what are the reasons behind that statistic?

• There is an unbridgeable gap between what the seller thinks their business is worth and what the buyers are willing to pay.
• Buyers refuse to budge on deal terms that are unacceptable to the seller (and terms are often more important than the price).
• There is a “showstopper” flaw in the selling company that puts off buyers (excessive revenue risk, heavy legal or financial liabilities, talent flight risk, etc).
• Macroeconomic fears freeze investment activity (which clearly happened in both 2002 and 2009).

Note that just because a business is flawed does not mean that an exit is out of reach. You might have greater revenue concentration than you desire, or a complex contract that no one wants to take on, or stale technology with cash flows but no growth prospects — but you can still find potential buyers in each of those cases (although probably not if your business is facing all of those challenges at once!). It all comes down to price and terms.

To return to the original question, every owner has to account for their own level of risk, but remember this: it is painful enough to go through a sales process and come up empty handed. It is twice as painful to have that happen with material damage done to your business. So think about those risky moves. Think about when you disclose a potential sale to your management team, and how you set their expectations. Think about how you control the optics of the process to the market and to your customers (and competitors!).

Negotiate in good faith, but operate like the deal will fall through.