If you are to sell your company successfully, trust is one of the key components when you and a prospective buyer begin the process of due diligence. You can’t appear to be doing anything that would undermine the trust of the prospective buyer, such as hiding information, exaggerating numbers or opportunities.
Even with the best of intentions, you could lose the sale if you lose the buyer’s trust. I learned that the hard way when I was thinking about selling one of my companies.
A few years ago, an interested buyer called out of the blue and wondered if I would sell my company. I quickly compiled a twenty-page presentation that outlined our history, staff, customers, equipment, assets and financials. As an “old” salesman my tendency was to highlight the positives and paint a rosy picture – all of which I believed to be true. I reviewed our financial reports, created a lovely chart showing revenue, profits, assets, and what I believed to be our EBITDA. It was a beautiful document.
One of the ways to determine a selling price for a business is to use a multiple of EBITDA. But I learned that Earnings Before Interest, Taxes, Depreciation and Amortization is not a black and white number that you can take from the balance sheet; and, you might want to leave it to the professionals to formulate.
After sending my beautiful document to him, I began to have second thoughts about my calculations so I checked with our GM. He came up with a number that was lower than mine. I sent a memo to the prospective purchaser outlining the change, and explained why. But, I was still uncomfortable, so I did what I should have done in the first place; I got my accounting firm to do the same exercise. Their number was even higher than my first number! What to do?
Even though I wasn’t angling for a higher price, I held the accountant’s number in reserve for my negotiations. When we began discussing a purchasing price, I pulled it out to indicate why his offer was way too low. (He had used his own calculations of EBITDA that differed from mine.) That was it. He was immediately turned off and cut the discussion. He said he couldn’t trust me, because the numbers kept changing and he didn’t know which ones to believe. He was justified. Even though I suggested he speak with the accountants to verify the numbers, the trust was broken. He refused to proceed.
Once trust is gone, it’s gone. Get your numbers right the first time. Go overboard making sure that you are providing the information the buyer needs to make a good decision.