Selling a business or involving a financial partner is often a life-changing, one-time transaction for many sellers. It is important to prepare competently and thoroughly for the transaction to increase the value of the company and avoid discounting the price. We take a look at the common mistakes that sellers often make in M&A transactions:
Any transaction requires thorough preparation. At this stage, it is important to analyze the market, conduct an extensive audit of the target company, assess and work through the potential risks in order to close the agreement on the most favorable terms. The preparatory stage usually takes several months, but can take longer if restructuring is involved.
Failure to understand the actual timing of the agreement can harm the seller. If the seller rushes to sell their asset, they risk getting a lower price for it or making mistakes that will take even longer to correct. Conversely, if the seller delays the process, there is an increased likelihood that the agreement will fail. A good and tightly managed schedule is paramount to a successful execution.
The seller should research his acquirer thoroughly and have a realistic idea of the price for the asset being sold and arguments as to why his company should be priced that way. The seller’s position should be based on credible financial projections and realistic expectations.
When an investor enters into negotiations, he asks for information about the business, the disclosure of which without a non-disclosure agreement may cause a loss of competitive advantage or lead to losses. Especially if the buyer of the company is a strategic competitor.
Even rumors of an impending sale can provoke the departure of top employees. Depending on the size of the company, such departures can lead to a significant loss in value and can even lead to the cancellation of the deal.
A financial adviser takes on a huge amount of responsibility – from finding buyers to assessing the synergies achieved after the deal is completed. An experienced financial advisor not only acts as a mediator in the transaction and coordinates the work of all parties involved, but also makes the sale competitive. The advisor’s job is to find multiple potential buyers. Healthy competition always benefits the seller and adds value to his asset.
Shareholders of the selling company can collect additional payment(s) (so called earn-outs) after the transaction closes, depending on financial performance or the achievement of certain milestones. This is one method of dealing competently with a dispute over valuation differences between the seller and the buyer. But for the process of obtaining such payments to be painless, the key points of the agreement must be carefully drafted.
One of the challenges that comes with design services is the cyclical nature of the services business. When the economy tightens and corporates are watching their operational expenses, the first step will be to halt any external contracts/contractors which are not deemed absolutely essential.
Whereas the earlier (staircase) model is a good approach in scaling up revenue and creating new revenue streams, the foundation of the company is still based on the service model: headcount continues to be the main driver (typically up to 60-70% of revenue). In terms of (enterprise) valuation the additional revenue streams, however, will already make a significant difference.
Design services companies typically start small (some exceptions when it concerns management buy-outs) and natural growth is a slow process as it requires hiring and training of engineers based on/driven by the revenue stream of the company. Growth of business is tied to growing the team and it is not always easy to find the engineers.