Mistake #5: You fail to negotiate the key terms of the deal in the letter of intent (LOI).
"There are phases to the LOI," Gaeto says. "As you go through each phase, we do our diligence, we build our materials, and we go out to a target list.
"You send out your emails, you make your phone calls. You get an NDA signed, you send the book, and eventually have an executive visitation -- the buyer comes out on-site and meets the team. Then we ask for an offer.
"In that letter of intent, we have a high-level offer, and that goes to the attorneys. Is it a stock deal or an asset deal? How are you go to pay for it? What are my roles? Is there any hold-back? Those high-level things get negotiated. Most LOIs are just two or three pages, but it memorializes your verbal negotiations.
"The thing most typically left out is the type of deal: stock versus asset, payment terms, how and when, escrow terms. For example, the buyer is willing to pay $10 million, but they want to hold out $2 million for a year, plus another $2 million against future revenue, and another $2 million is held back against receivables. So, when you get done, it's really a $4 million deal."
Mistake #6: You don't disclose some deal-killing details.
"Material items and events need to be disclosed," says Gaeto "For example, I had a client who hid the fact that he was being sued by a former client for alleged IP theft. I had another client who 'forgot' to disclose that a former partner owned 50 percent of the business.
"Those issues weren’t even disclosed to me. It's hard to negotiate in good faith when you don’t know all these background facts. You need to be honest and forthright with your advisors -- all of them."
Mistake #7: You assume that you or your investors can handle this.
"Many sellers think they can do things on their own, without the help of a solid set of advisors," Gaeto says. "This is related to the third point: They don't understand the sell-side process.
"They don’t get that it’s a structured sales process with many moving parts, and the objective of a structured sales process is to create a competitive dynamic. The sale process has a number of phases, tasks and protocols.
"Knowing how to manage the process and adjust it -- slow it down or speed it up when necessary -- is very important. Most entrepreneurs don’t have the skill set nor they experience to work buyers and play buyers off of each other.
"I just had a situation where one company said. 'I don't want to pay that fee; I'll do it myself' -- and they did. Sometimes it works. But if you want to really make sure you get the best price, you need to go out to lots of targets, and you need to manage the dialogue -- and it's hard to do that while you're trying to run a business.
"Some can pull it off, but many end up with sub-optimal valuation and deal terms. The fee [to your M&A advisors] creates a competitive dynamic. If you’re a buyer, and there's a banker involved, and the buyer sees there's a process, he's going to assume there's competition.
"Sometimes there will be only one offer, and it's up to the owner or the board to decide what they want to do. Ninety percent of them sell. But there are times where an advisor will tell the owner, 'Let's just shut the process down, let's grow the business, and let's take this out again in two years.'"
Most M&A advisors work on a minimum-plus-a-percentage basis, Gaeto says. "Our fees vary; it depends on the size of the deal and the likelihood of getting sold. Sometimes it's a flat percentage, sometimes it's an incentive-based plan.
"Most bankers want to go in with a minimum, but for us it's all success-fee-based. It ranges from a couple points up to 10 points on small deals.
"Part of the fee is because we're managing the deal, and it's much like any other large, complex project. Second, if we can get someone from an $18 million to a $25 million valuation, the fee will seem a lot less important."
Mistake #8: You don't hire an experienced deal attorney.
"Too often, the seller's attorney is a generalist, not a specialist," says Gaeto. "Deal attorneys are more expensive, but they are worth their fees, and they can get a deal done faster and with better terms.
"Like anything else, the art of doing comes from doing. The specialists have seen deal terms in so many different situation for so many different sides, they can construct a deal without learning as they go. The bad news is their rates are probably 30 percent higher than a general corporate attorney.
"In software there are certain things like IT ownership where the more focus, the better. There are lot of law firms that have pretty broad appeal; we like Pepper Hamilton, in Philadelphia. If it's a tech deal, Chris Hamilton will step up, but if it's a manufacturing deal he'll refer us to another guy in the firm."
Mistake #9: You fail to do your homework around valuations.
"For young technology firms, valuations get tricky and sellers can't simply point to industry stats," Gaeto says. "You need to triangulate a handful of different methods using specific company data, and you have to understand the dynamics of the specific sub-sector they are in.
"This goes both ways: Some owners over-estimate and some under-estimate valuation. You have a lot of guys who read an article from Price Waterhouse or Grant Thornton or one of the other M&A firms, they'll say, 'Software firms are going at 4X, so my firm is worth 4X.'
"Well, it could be, but the people who are getting rich multiples have a lot of other variables. Beauty is in the eyes of the buyer, and a seller could get a premium based on well-understood, documented, mapped synergies that it can bring to specific buyer.
"For the past year we've seen social media companies get very rich valuations, from two to 20X multiples. I'm sure there's a very good reason they're getting that, but the averages don't apply. A buyer will use the market for comparables, but the synergies they apply are going to be different for each and every buyer.
"I recently represented a small company; we went out to more than we usually go out to, and the valuation we got was fair: one-and-a-half to two times revenues.
"But then another party stepped up and really liked the team, and really liked how the customer base was using the product. Well, they paid a premium because they had a product they wanted to get out the door, and they had their own customers -- and the valuation went to 4X."