In this article, Jay Jung identifies the five biggest mistakes founders make when they sell their business and explains how to avoid them.
Our firm is well known for advising founders/business owners when it’s time to sell their companies. Fewer people know that we also advise buyers–like private equity firms–when they are acquiring these businesses. It’s in the latter where we see a seller’s mistakes firsthand.
Building a business and selling a business are two different skill sets. Even smart business people can overlook important details in unfamiliar situations. And for many founders, that’s exactly the position they are in when selling their businesses.
Here is an example. In 2002, the online payment processor Paypal was acquired by eBay for $1.5B. Even then, Paypal was a dominant player in the online payment space. While its potential wasn’t fully realized, Paypal was already known as a formidable pioneer in fintech, and many people argue that this price was too low.
As a founder, you’re invested in inspiring growth. And when you sell, you’re hoping to capitalize on that investment. For many, it’s a decades-long journey. Here are five steps you can take to make sure you don’t lose out in the final inning when it’s time to sell.
Mistake #1: Skipping the Seller’s Quality of Earnings (QofE)
When a buyer and a seller enter a negotiation, each one has a range of numbers in mind. This means there is an opportunity to settle on a higher (or lower) price based on how value is communicated during the negotiation phase.
As the seller, how do you know that your numbers are realistic–or that any offers on the table are materially appropriate? First, you need to know what your value is based on real data. That means calculating EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
This common financial metric is used to determine the profitability of founder-owned companies.
The mistake that sellers often make is focusing on the multiple in this equation when they really should be focused on the EBITDA. If you spend $20k on a QofE and you trade at a multiple of 10x, but we find an additional $20k in adjustments, your return on the QofE is 10 times the cost of the assessment.
Key points include:
Marketing on LTM
Being Vague with LOI Details
Skipping Diligence Work on Buyers Stock
Read the full article, The 5 Biggest Mistakes Founders Make When They Sell Their Business, on LinkedIn.