Understanding M&A: 4 Reasons Business Exits Fall Short of Their Potential

When it comes to mergers and acquisitions (M&A), many businesses find that their exits fall short of their potential value. Understanding why this happens is crucial for anyone looking to sell their company. Here, I outline the four main pitfalls that can lead to suboptimal business exits and provide advice on how to avoid them.

Introduction

Why do some businesses sell for far less than they’re worth? It’s a common and frustrating issue that many business owners face. In today’s discussion, we will delve into the four main reasons why business exits often underperform and what can be done to avoid these pitfalls. By understanding these key areas, you can better position your business to achieve its full potential value during a sale.

What You Are Saying

Poor Narrative

The first major pitfall is a poor narrative. Businesses sell based on three main PRS: profitability, access to end markets, and proprietary capabilities. These elements need to be clearly defined and well-balanced to maximize the business’s value. Too often, businesses focus too much on one aspect while neglecting the others, which can lead to undervaluation.

A compelling narrative should comprehensively cover all three areas. Profitability shows the financial health of the business, access demonstrates the market potential, and proprietary capabilities highlight what makes the business unique. By crafting a well-rounded story that addresses these components, you can present a compelling case to potential buyers, ensuring they see the full value of your business.

Poor Outreach

The second pitfall is poor outreach. Many businesses rely on inbound interest or generic, unfocused outreach strategies. They either wait for potential buyers to come to them or send out blanket emails without any personalization or strategic targeting. Neither of these approaches is effective.

A successful outreach strategy should be proactive and research-driven. It’s essential to identify and engage with the right potential buyers who would find your business to be a perfect fit. This involves understanding the industry landscape and crafting personalized messages that highlight how your business can solve specific problems or add value to the potential buyer’s portfolio. Effective outreach ensures that your narrative reaches the right audience, increasing the chances of finding the best buyer.

Who You Are Saying it To & The Path

Poor Access

The third pitfall is poor access. Even if you identify the right potential buyers, getting their attention can be challenging, especially if they are significantly larger and well-capitalized compared to your business. Large companies may not initially see the value in smaller deals, making it difficult to engage them.

To overcome this, you need to strategically craft your outreach and information to capture their interest. Highlighting the unique aspects of your business and how it fits into their strategic goals is crucial. Effective communication and persistence are key to ensuring that potential buyers see the value in your business, regardless of size discrepancies. By engaging the right parties and getting them to pay attention, you can increase the likelihood of a successful transaction.

Poor Process

The fourth pitfall is a poor process. Even with a strong narrative, effective outreach, and good access, a poorly managed sale process can derail a deal. It’s essential to facilitate the process in a structured and competitive manner.

All potential buyers should be aware that they are part of a competitive process. This means collecting data simultaneously from all parties and maintaining transparency throughout the process. By creating a competitive environment, you can drive better offers and terms. This approach ensures that all variables are optimized, from price and structure to transition periods and stakeholder considerations. A well-managed process is critical to achieving the best possible outcome.

Summary and Conclusion

To avoid these pitfalls, it’s important to select the right advisory firm to manage your sale process. Choose a firm that understands your business’s size, ownership structure, and goals. The best firm for you is one that aligns with your specific needs and has experience in your industry and market size. By working with a firm that understands your business and market, you can ensure that the sale process is managed effectively, maximizing your chances of achieving the full potential value of your business.