3 questions to smart minds

Company sales are often poorly prepared

For this 3 questions to F. C. Raffel

Photo: F. C. Raffel | Raffel Corpo­rate Development
7. Febru­ary 2012

Not only corpo­rate finance advi­sors but also private equity firms find that company sellers are often inade­qua­tely prepared and often make unrea­li­stic assump­ti­ons. — Raffel Corpo­rate Deve­lo­p­ment evalua­ted the respon­ses of 48 private equity firms as part of a study in 2011 and found that the pros­pec­tive buyers surveyed in the German SME sector frequently stated that the compa­nies offe­red for sale were in many cases poorly prepared for the sale or not prepared at all. — In which areas do the defi­cits lie here? 

For this 3 ques­ti­ons to Mana­ging Direc­tor of Raffel GmbH Corpo­rate Deve­lo­p­ment in Munich

1. How is it that corpo­rate sale­s­peo­ple consis­t­ently make unrea­li­stic assess­ments of their companies?

Owners who intend to sell compa­nies often use incor­rect basic para­me­ters to deter­mine the value of their own company. For exam­ple, one has alre­ady heard of company sales where x times the reve­nue was paid and applies this “multi­ple” to one’s own company without taking into account indus­try speci­fics, reve­nue diffe­ren­ces, etc. Or the owners calcu­late the “value” of the company via the capi­tal inves­ted in recent years. — The change of perspec­tive from that of an inves­tor, for whom only the future return on invest­ment usually counts, is often diffi­cult for owners. In addi­tion, some appraisals simply do not deter­mine the actual market value of the company, ther­eby raising expec­ta­ti­ons too high.

2. What are the main issues that have emer­ged in the course of your study? (lack of future attrac­ti­ve­ness, too high risks, etc.?)

The sale of compa­nies is all about high values. What was all the more surpri­sing from the survey results was that even the majo­rity of the compa­nies put up for sale were not prepared for the sale at all or were poorly prepared. Proba­bly no other market where valuable items are offe­red is so unpro­fes­sio­nal on the supply side.

The most common weak­ne­s­ses in the compa­nies offe­red are their lack of future attrac­ti­ve­ness. Often, the multi-year plan­ning is not linked to imple­men­ta­tion measu­res or stra­te­gies, which is why the company’s future growth, which is suppo­sed to be above indus­try growth accor­ding to the nume­ri­cal plans, is not compre­hen­si­ble. Opera­tio­nal weak­ne­s­ses are usually not clearly analy­zed, although they repre­sent poten­tial for future improvement.

The risks at the compa­nies offe­red are also substan­tial. The opera­ting influence of the legacy share­hol­ders is often still very high, which causes the buying inte­rests to have concerns about the stabi­lity of the busi­ness after the purchase. In the majo­rity of compa­nies offe­red for sale, there are also many “clus­ter risks” on the sales side, and inte­gra­ted plan­ning is lacking.

In addi­tion to an overly high asking price, tran­sac­tion secu­rity often suffers from a company’s manage­ment that is insuf­fi­ci­ently prepared for the sale — a “key issue” for private equity investors.

3. What advice do you give to poten­tial busi­ness sellers so that they can achieve the most reali­stic selling price possi­ble or opti­mize it even further?

Three points to take to heart: 1. prepa­ring the company for sale (a conti­nuous task, not only for sales projects); 2. Do not offer to the “first best”, but deve­lop a well thought-out sales stra­tegy; 3. Hire profes­sio­nal consul­tants for the sales process, because they pay for them­sel­ves quickly.

The damage of a sales tran­sac­tion that does not go to closing can be immense. — Consul­tants specia­li­zing in the sales process help to signi­fi­cantly increase tran­sac­tion secu­rity. Serious advi­sors provide sellers with a reali­stic purchase price idea that is in line with the market. They prepare manage­ment for the sales process and help to over­come the obsta­cles that always arise in a sales project. Some­ti­mes this includes talking to the fami­lies of the vendors or best friends.

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