T HE C ORPORATE C ATALYST
Common Mistakes of Sellers
Michael Cohen
You have spent years building a successful
company. The company is profitable and still
growing. You have other life interests to pursue
(travel, family, hobbies, etc.). What are some of the
common mistakes business owners often make at this
time?
1. Waiting too long before deciding to sell –
Indecision, waiting for a compelling reason to sell, or
complacency can cause you to miss the optimum
timeframe to sell your business (see related article
“Best Time to Sell a Business”). Waiting too long
can impair value and also deny you the benefits of
selling your business (wealth diversification and more
time for other interests). Also, it is important to
realize that the sale process can take a full year to
complete and if your desire is to exit the business
your services may be needed for another year or more
to complete an orderly transition process.
2. Conducting a “limited” or “exclusive” sale
versus a “managed” auction - Managed auctions
usually produce multiple viable offers, or options,
allowing you to choose the combination of price,
terms, buyer, and transition scenario to suit your
personal values. A “limited” or “exclusive” sale both
limits your options and also provides the prospective
buyer with undue initiative in formulating a
transaction, almost always resulting in a sub-optimal
offer. Still, too many sellers are seduced by the party,
friend, or competitor that has expressed interest in
buying the business for many years, only to sub-
optimize their potential transaction by being reactive
rather than proactive. When these self-proclaimed
buyers are run through a managed auction, they are
rarely selected as the ultimate buyer for the business.
3. “Flying solo” as opposed to engaging an
investment banker – While directing the sale process
yourself day-to-day may seem cost effective, it
usually results in lost confidentiality, incomplete
preparation, ineffective marketing materials, lost
time, negative impacts on the business, and poor end
results. Financial and strategic buyers are usually
highly experienced and sophisticated acquirers. An
Copyright © 2008 Michael Cohen. All rights reserved. Electronic redistribution by email is encouraged.
investment banker will help you level the playing
field, maintain confidentiality, insulate your
employees from the process, ensure effective
preparation and marketing, create a valuable buffer
between you and the buyers, and maximize your
results.
4. Inadequate preparation (adjusted financials,
buyer research, etc.) – Advance preparation is crucial
to induce multiple serious buyers to go thorough the
process of reviewing, valuing, and making competing
offers in parallel. Proper preparation by an outside
expert creates a sense of urgency and an atmosphere
of competition among buyers seeking to acquire the
business. Preparation includes making clear and
justifiable adjustments to historical financial results,
detailed financial forecasting, data room assembly,
development of effective marketing materials, and
crafting a thoughtful list of prospective buyers.
5. Poor packaging and presentation materials –
Distilling, documenting, and communicating the key
factors that have made your business successful is an
art. Translating your strategy and business results
into the corporate finance language of strategic and
financial buyers is essential in developing effective
marketing materials.
6. Lack of a proper Data Room – The Data
Room brings all of the material physical or electronic
documentation on the business into one controlled
location for timely review by prospective buyers. The
Data Room is also your opportunity to provide all
necessary disclosures about the condition of the
business upon sale. A properly prepared Data Room
is essential to save time, facilitate competition for the
business, and ensure legal documentation of the
transaction.
7. Ineffective marketing – A comprehensive
buyer list and effective communications are essential
to maximizing your transaction. Initial contacts are
made using blind materials to protect the identity of
the company until interest and capability are
confirmed and a Confidentiality Agreement is
executed. The Confidentiality Agreement is often
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individually negotiated with each buyer. Once seller to the buyer, (c) commitments and limitations
established, covered buyers should be provided with affecting the seller, etc. The identity of the buyer and
carefully prepared information designed to promote the scenario may be important to the seller. For
their interest in and guide their view of value for the example, is it a financial buyer that will retain all the
business. employees and continue to grow the company? Or, is
it a strategic buyer that intends to move all the work
8. Compromised confidentiality – Maintaining
to another location? Sometimes entrepreneurs will
confidentiality is important both internally to avoid
accept a somewhat lower price for their business to
employee distraction and externally to shield
allow the business to continue in its current location
customers and competitors from the knowledge that
with the same workforce that made the business
you are considering a transaction. Engaging a
successful. Also, different buyers may require
professional intermediary will provide you with a
varying degrees of ongoing personal involvement by
layer of anonymity and some controls that would not
the former entrepreneur/owner, family members, or
otherwise be available to you if you go “solo.”
management team which may or may not resonate
9. Under-reporting past profits (for tax with their personal goals.
purposes) – Privately held companies are usually
Knowing the common mistakes of sellers can
managed to minimize taxes, which runs contrary to
help you and your representatives avoid potential
the objective of maximizing value upon sale. The
pitfalls when selling your business while achieving
solution to this dilemma is to recast your historical
your personal goals and maximizing your results.
financial results using clear and justifiable
“adjustments” to present your results in the most
For more information, contact any Principal at
favorable light possible. Buyers understand this issue
Global Capital Markets, Catalysts for Corporate
and they expect to see appropriate financial
Finance: www.GlobalCapitalMarkets.com
“adjustments.”
10. Failing to disclose everything material to the Michael Cohen is a Principal at Global Capital
buyer early – The Data Room is your opportunity and Markets. Previously, he led strategic acquisitions
the best time reveal all material information about the and divestitures at Honeywell International and made
business. Waiting until late in the process or not equity investments at Norwest Equity Partners,
disclosing material information can weaken Norwest Venture Partners, and 3i Capital. He earned
credibility, undermine your negotiating position, or an M.S.E.E. from Drexel University and an M.B.A.
result in a significant liability. from the Wharton School of Business.
11. Granting exclusivity too early in the process –
Buyers typically strive for exclusivity early in the
process. However, granting exclusivity too early
diminishes the seller’s negotiating advantage.
Conversely, reluctance to grant exclusivity at the right
time can discourage an experienced buyer from
proceeding. Exclusivity may be valuable late in the
process, once the price and key terms are agreed, to
compel a serious buyer to increase legal, accounting,
and due diligence resources to expeditiously close the
transaction. Knowing when to grant exclusivity,
under what terms, and how to communicate this to
prospective buyers requires judgment and experience.
12. Selecting an offer solely on the basis of price
– There are many other valuable features to an offer
in addition to the price. Certainty of closure can vary
greatly from one buyer to another. Some offers
contemplate significant deferred or contingent
payments. Deal terms that may have value include
(a) the amount and duration of any escrow, (b) the
extent and duration of indemnifications from the

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