08 Oct The Seven Most Common M&A Mistakes and How to Avoid Them
by: David Mirza
Selling a company that you have built with years of hard work is a difficult and time-consuming process. As a business owner, it is important to know the value of your retail energy business. In the last ten years, I have seen buyers pay well over $1,000 per RCE and I have even seen cases where the seller is paying the buyer to take over a portion of the book.
Every buyer values the book differently; you will get two to three different offers for the same book. Here are the top seven most costly mistakes sellers can make.
- Only Getting One Offer: There are hundreds of active retail energy providers. At any given time, it is fair to say that there are well over a dozen buyers actively looking to buy retail energy businesses. It is important to get at least two to three offers. A serious buyer can give you an offer within a couple of weeks of the initial M&A discovery session and reviewing the usage profile data With a little bit of planning and effort, you can get two to three offers easily in four to six weeks.
- Earnout vs Lump Sum: In all of the deals I have closed, the seller got a 100% lump sum payment within 3 months of the sales contract being executed. There may be an upside on paper for earnouts, however, it is risky as there may be no minimum guarantees and your earnout is at risk due to several factors outside of your control (renewal rate, projections, milestones, switch outs, move outs, weather, complaints, communication, brokers ….). Regardless of which option you choose, ensure you decrease your risk as much as possible.
- M&A Ready Buyer: Most buyers and sellers are not M&A ready. If you are planning on selling your book to a buyer who has never closed an M&A transaction, this can lead to a disaster waiting to happen. Don’t rush; do your due diligence as a transaction of this magnitude is highly complex with several moving parts. You need to ensure all key areas of billing, product mapping, customer data, legal, regulatory, … are covered. Ask lots of questions before executing the sale agreement so that you have a clear idea of what to expect along with an anticipated timeline.
- Extensive Time and Effort: Successful M&A deals require a lot of advance preparation from the seller. Not being prepared (data sharing, renewal rate, margins, broker agreements, hedges, technology, …) can lead to diminished value and frustration. Get ready to roll up your sleeves as you go through the M&A journey. Have all key data that a buyer will want to review in one place. This will include key contracts, usage details, financial statements, employee information, and much more.
- Realistic Market Expectations: A well informed seller will have realistic expectations. Every seller wants top dollar for their book; however, each book is valued differently using multiple data points (for example, margins, better technology, etc.)
- Review the Sale Agreement: Once you have accepted the verbal/written offer, the sale agreement is one of the final steps in the sale process. This is a very important document that should be read in detail not just by legal counsel but by the seller. Ensure that all the provisions that are detailed out by the buyer can be acted upon and delivered by the seller.
- Not Hiring an Experienced M&A Broker: In many situations, an M&A advisor can bring value by doing the following:
- Developing an optimal sale process
- Helping prepare an executive summary and confidential memorandum to potential buyers
- Contacting multiple prospective buyers
- Coordinating signing of NDAs and scheduling meetings
- Working on data gathering and discovery sessions
- Advising on market comparable values
About the Author:
David Mirza is President of MedTractions. David helps Retail Energy Providers with IT and M&A.