Common Mistakes of Entrepreneurs Looking for an Exit
Entrepreneurs are naturally a particularly optimistic bread of people. They often see potential and pursue it with everything they have. This is particularly helpful to them as they are building and expanding their businesses. However, this is sometimes detrimental when they are placing a value on their business in the pursuit of an exit strategy. While some venture capitalists and private equity groups, along with private investors and strategic acquirers, will place the value on the future cash flow potential, most do not believe the company will be as successful as the entrepreneur does. When looking for an exit, entrepreneurs can be to optimistic.
This can be harmful because they will expect too much, or ask for too high of a valuation, thus chasing away any investors that would have otherwise been interested. What is the value of a business? It is the same as a pencil, whatever someone willing to pay for it. In these circumstances it is often better for the entrepreneur to get an outside opinion. This is also true when the negotiations begin. Since the person who has built the business is often tied to it emotionally, it is somewhat like selling a child, no matter what price someone places it is to low. That is why it is always good to get an outside perspective from a third party professional who is not as tightly connected and who understands the industry.
Prolonged Negotiations
Some businesses are predominantly appealing to investors, especially businesses and industries that produce healthy cash flows for investors. When a business like this enters the market entrepreneurs often try to prolong negotiations in hopes that another buyer will make a better offer. While this is rarely successful, it is often detrimental. Over time the party making an acquisition will begin to be suspicious, lose interest, find other opportunities more appealing, or find aspects about the business that turn them away. It is better to move forward at the speed the buyer is willing to go as much as possible without leave the seller short handed.
Going Solo
While there is some bias on my part as an M&A advisor, I do believe one mistake an entrepreneur can make is trying to represent themselves in the sale of their business. One reason is because of the issues discussed above. Another is because of the lack of experience in the M&A market. Having a third party representative helps to create the right expectations and avoid letting the emotional ties get in the way of getting a deal done, even if it is a board member.
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