At first glance, it is tempting for a CEO to try sell his or her own company. After all, he knows the company and the market very well. A CEO’s mindset can often be characterized as: “I know the industry; I know how to negotiate; I’m a smart guy – I can do this. Plus, we will save a fee.”
However, a CEO should spend his time where he can create the most value — running the company, setting goals, monitoring progress, and executing the business plan.
Over the years we have observed many CEOs attempting to sell their own companies. What follows are 18 common mistakes that CEOs make when trying to undertake this task.
#1 “This Will be Easy”
Many CEOs think selling a company is easy. The process seems very straightforward: find a buyer and agree on the price.
Sometimes CEOs think they have a head start because the company currently has licensing deals with several firms that might be potential acquirers.
What they fail to take into consideration is the tremendous amount of time and effort to do the job right. Without significant experience in M&A, they miss the subtleties that can lead to a higher price, more favorable terms and a smoother process.
The situation is analogous to taking on your own home remodeling project. On the surface, it looks fairly straightforward. However, halfway through the project you uncover some unforeseen problems that are beyond your expertise. In hindsight you would have been better off bringing in a professional, saving both time and money with a better end result.
#2 Too Narrow a Search
CEOs tend to pick the low hanging fruit. Their search process is not thorough. Once a CEO begins discussions, she or he stops looking for additional prospects. He is content to engage one or two potential buyers. In addition, CEOs rarely seek out the tangential and fringe companies that often can be very qualified buyers.
Deals can fall apart. Get multiple offers; create some competitive bidding. However, creating competitive bidding involves too much work for the CEO.
Many CEOs tacitly assume that the incremental price will not be worth the incremental effort. This is simply not true. They fool themselves into thinking that the buyer in hand will pay the highest price.
#3 No Full-Time Commitment
Identifying and contacting candidates is a full time task that can last for several months. This process can be very tedious – something that an executive level person may not want to undertake.
A CEO who is running a business cannot possibly give his full attention to a comprehensive search process.
#4 Ignoring Opportunity Cost
Where can the CEO add the most value? Trying to sell the company or continuing to build it? The CEO creates more value by continuing to increase traction in the market and growing revenues than the amount of the fee saved. The CEO should spend his time growing the business.
#5 Selling the Future
Most CEOs are accustomed to raising capital and they see the process of selling a company as very similar to raising capital. They think this experience is transferable to selling a company.
When trying to sell the business, they paint the same picture. They sell their vision — large markets, rapidly growing revenues and substantial profits. They focus on where they are going, not where they are. In other words, they are selling the future.
A business plan is forward looking — it’s about growth. It is about the future. A selling memorandum, on the other hand, focuses on the present. It is a coherent snapshot of the current situation. This is where the company is today. This is the technology that is complete today.
#6 Presenting the Wrong Information
CEOs don’t take the time to develop the proper documentation to promote the sale. Most fail to draft a selling memorandum or even a one-page summary of the acquisition opportunity.
Most CEOs just send out a business plan, not a selling memorandum, without realizing that there is a difference.
Since they are not well versed in the process, CEOs are not usually aware of what information should be communicated at different stages of the M&A process. They give the wrong depth of detail — too much information too soon or too little information too late.
#7 Poor Positioning
CEOs generally are not skilled at positioning the company to potential buyers. How should the company be presented? What technology should be emphasized? Which assets have the most value in the marketplace?
Technology assets may carry a different weight in the market than they do internally. Assets should be viewed from an external perspective, not from management’s internal perspective.
Since value is extrinsic, buyers will view value differently from each other and differently from the CEO. One buyer may want to add the seller’s products to its product line; another may embed the seller’s core technology inside the buyer’s technology.
#8 Glossing over the Negatives
CEOs love to portray their company in a good light. “Everything is going great. We have great marketing, great technology, great people.”
CEOs are so close to the situation that it is difficult for them to view the transaction from the buyers’ eyes.
When a serious buyer completes their due diligence, they will know almost everything about the company, warts and all. It does no good to start off by saying the company has no warts; it just wastes everyone’s time.
CEOs rarely admit that they have done a poor job in marketing or sales. However, a company with excellent technology that has not had the time or capital to make a serious marketing effort can be positioned as an opportunity for the buyer.
#9 Representation without Representation
Third party representation signals that the seller is serious. Buyers have some assurance that they are not wasting their time with a tire kicker. If a potential buyer receives an inquiry from an investment bank, it means the company is being represented professionally. Plus, the deal has been screened; it has passed the muster of the investment-banking firm. Buyers don’t want to waste time with a company that is not serious about selling.
#10 Unable to Ramrod the Transaction
The CEO cannot push the transaction without appearing somewhat desperate. He cannot call the buyer every other day. An intermediary, however, can ramrod the transaction. They can call the buyer three times a week to keep the deal moving forward. This is the advantage of being a third party; they are just doing their job. Buyers expect them to be aggressive.
#11 Setting the Wrong Price
A CEO’s own prejudices can cloud the value issue. Unrealistic value expectations can be deadly. What the market is willing to pay may be very different than what the CEO thinks his company is worth or ought to be worth.
CEOs may want to sell only if the price is over a certain threshold where his stock options are in the money. This may put strains on pricing the deal and may not be in the best interests of shareholders. Unrealistic value expectations can be deadly.
#12 The Fallacy of a Narrow Value Range
This is a subtle mistake, but a common one. CEOs assume that value falls within a narrow range and that an interested buyer will pay them what their company is worth. This presupposes, of course, that they know what their company is worth.
In most areas of our lives where we sell big-ticket items, value falls within a fairly narrow range. A house may range between $725,000 and $875,000 — plus or minus 20% — depending on market conditions and timing. It does not swing from $725,000 to $8.5 million.
A technology company, however, can range quite widely in value. The same company could be worth $2.5 million, $6 million, or $11 million depending on the strategic fit with the buyer. How does this affect the process of selling of a company? Don’t assume that buyers will pay similar prices. Offers may vary dramatically, so go get as many offers as possible and take the highest one.
#13 Failure to Manage the Process
The sale of a company involves many detailed activities. Time lines must be met and one of the tasks an investment banker performs is to manage this process. You don’t just locate a buyer and then have a few meetings. Many tasks need to be accomplished along the way.
A professional intermediary can make sure the deal moves along in a timely manner, activities are coordinated among the parties, and the inevitable obstacles that occur in every transaction are overcome.
#14 Not Listening
A CEO often focuses on what points he or she wants to make and what he or she wants to say. One must listen with big ears. What is the buyer saying between the lines? What are they really after? What is the feeling you get from them? A good negotiator is really a professional listener.
Buyers tell a third party things they would never tell the CEO. A third party can pick up many clues along the way about how strategic the technology is to the buyer, how the buyer perceives value and how much they might be willing to pay.
The negotiator’s job is to figure out the other side’s motivations and how to get to the next step. There are many ways to solve the problems that inevitably pop up. The biggest danger is not being aware of a problem before it becomes full-blown. You can’t head it off if you don’t know it’s there.
#15 Uncreative Structuring
There are so many ways to structure a deal, so many ways to be paid; it is not just stock or cash. Since they are not professional dealmakers, CEOs are generally not very imaginative in coming up with creative structuring ideas where both parties might be better off. The key to good structuring is to fully understand the objectives of each party and have an open, creative mindset.
#16 Adversarial Beginnings
Sometimes things can get a little heated, with friction developing between the buyer and seller. To avoid an adversarial relationship between the parties going forward, it is best to have an intermediary handle the negotiations. An experienced third party will be more adept at knowing what paths not to take and what conversations not to have.
A case in point is negotiating the president’s salary and option package. Who can best negotiate these items — the CEO or an independent third party? Let the third party be the bad guy.
#17 Incorrectly Valuing the Buyer’s Stock
If the seller receives stock from the buyer, what is the value of that stock? A private firm’s last VC valuation may be totally arbitrary and a public company’s stock price may not be representative. Most investment bankers are experienced at valuing companies and can be very helpful in negotiating a value that is real.
#18 The Fallacy of Saving a Fee
Everyone loves to save a fee. Is trying to save a fee really worth it?
CEOs must ask two questions regarding saving fees. First, is the amount of the fee saved greater than the incremental value that the CEO could create by focusing on building the business? Second, is the amount of the fee saved greater than the incremental price paid by having several bidders?
Rarely is the amount of a fee saved greater than the opportunity cost of the president’s time, nor is it greater than the value derived from competitive bidding.
Most CEOs underestimate the time & effort to do a thorough job selling a company. The right thing for the shareholders is to have a professional intermediary sell the company, not the CEO or his team.