Six things you must know before selling your business
Valuation neither art nor a science?

Kissing Frogs : buying a business - how not to get it wrong

It’s stating the obvious to say “don’t pay too much for a business“.   No prizes for that advice then.   And the consequences of paying over the odds can range from underperformance to financial crisis.   The aim should be to do the right deal after a thorough analysis and review.   Even then it sometimes goes wrong, in the Cambridge tech market the most obvious local example has to be what happened to HP and Autonomy.  HP no doubt invested huge sums in due diligence and used high powered M&A advisers – and yet somehow feels it overpaid.

Kissing frogsIt’s too easy to get caught up with the thrill of the chase.  The desire to buy sometimes overpowers the ability conduct a sober review of the business target.   That’s where having an experienced adviser alongside to play devil’s advocate – even if that means not doing the deal – is hugely important.  They should also be able to help with the appraisal and pricing of the target.  I often find myself counselling against a deal, or at any rate against paying a price the seller will accept even if it means I lose out on what on the face of it could have been an interesting project.  It’s more important that my clients do a good deal that adds value to their business.

Again stating the obvious – the seller knows all about the business, but he is motivated to sell it for maximum value.  He might not be lying to you; the future of the business may indeed be good, but maybe not.  You need to challenge what you see and hear.  Also this is where vendor finance – for example building an earnout into the deal – can help to de-risk the deal and keep the seller “honest”.

Your goal as a buyer is NOT to make the seller happy, although it helps if they’re not unhappy!  Offer to pay a price that works for you – having first considered three things 1) what it’s worth to you, 2) what the fair valuation of the target might be and 3) what is the Vendor’s best realistic alternative.   For a small business sale the latter might be just to keep it – all very well if she is 35 years old, not so if she’s already 71 years old.   

Don’t be afraid to walk away from a deal.  At the very least it’s a real learning experience to go through the process of appraisal, offer, and working with an adviser – all of which will pay dividends when a better or more realistic target comes along.   Sometimes you have to kiss a lot of frogs.  And if the one your looking at now turns out to be the handsome prince you’ve been waiting for (to stretch the metaphor to breaking point) then you should be prepared to put resources into the deal to make it happen – not just money, make sure you have the time to really commit to it.

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