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Four Explicit Don’ts When Pursuing a Business Exit

15 Dec Four Explicit Don’ts When Pursuing a Business Exit

There are innumerable mistakes which can be made when it comes time to sell a business. Investors and entrepreneurs alike, know the risks inherent in starting, managing and even selling organically-grown and venture-backed companies. Perhaps the biggest risk comes in attempting to sell the most illiquid assets tied up in the company. Because fewer companies are sold than most people think, it is wise to avoid some of the most glaringly obvious blunders many exiting entrepreneurs make when it comes time to sell their companies.

Don’t Let the Industry Know You’re For Sale

The simple reason for not being overly boisterous about the fact that if the company is on the market for a long period of time, the price of the company can substantially erode. In addition, if the industry knows the company is for sale, it could also be a trigger event for competitors and customers alike. The competition could find ways to block and thwart the sale or they could start letting customers know you’re on the market. And, if the customers know you’re on the market, the chance of them heading to the competition substantially increases.

Not Communicate Completely with Employees

Employees are seldom not worried about job security. Often in a business transition, many employees will understandable be given the ax by the new owners and management. As the business sales process unwinds, employees should not be left out of the loop, at least when it comes to communicating deal specifics when it comes to their jobs.

If employees are left out, they could become disenfranchised and disinterested in the company, especially if they feel threatened that their jobs are on the line. Revenues and costs could spiral downward or upward (as the case may be) and the company could ultimately look less impressive to investors who may be looking to purchase. The short of it: communicate openly to employees and try to make their transition as smooth as possible.

Disclose too Much Proprietary Information Prior to the Sale

Due diligence requires a slew of questions, but if you’re not under terms with a potential acquirer, it is often unwise to disclose too much information. Many companies are simply purchased for “goodwill” which amounts to nothing more than an intangible built-up over years of work. If goodwill is the only thing keeping your customers and your nicely-crafted business model from thief-like competitors swooping in and stealing your general business plan, then you need to protect yourself from every possible threat.

Unless you’re legally protected, it is highly unwise to give away too much proprietary information prior to the sale.

Let Individual Compensation Get in the Way of Shareholder and Company Goals

Company size helps to determine whether or not this even matters. If the company is a fully-owned S-corp and all business income flows onto their personal tax return, then conflict between individual compensation and shareholder goals at the time of the company sale is not going to be an issue.

Inconsistencies in shareholder/management goals often occurs when management is directly involved in merger negotiations. If this is the case, managers must learn to take the higher road and do what is best for all stakeholders and not just their own pocketbooks after the deal is closed.

The number of issues which could arise during the business sales process are nearly innumerable and can change swiftly from deal to deal. Understanding the big “no-nos” will be helpful in at least avoiding the proverbial sore-thumbs of selling a company.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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