Storm Warnings

Business Broker Services has developed the following scenario as an example that may be helpful when negotiating the selling of your business should you try it on your own.

A Buyer visit’s a Seller’s facilities and likes what he sees. “I’m very impressed,” he says. “I like everything I’ve seen here today.”

The Buyer reacts to the Seller’s asking price with no concerns or objects and says that an allcash sale might be preferable. The Buyer’s only concern is whether there are other buyers in the picture. The Buyer explains that his company’s attorneys, accountants, and numerous other advisors will need to review everything.

The meeting ends. The Buyer has the financials, other confidential details, and a 60-day standstill agreement. The Seller seems to have what he’s dreamed about—full price, all cash, and a buyer who will act quickly.

During the next 60 days, The Seller is dreaming of a life with all that money and freedom. His desire to sell becomes very strong.

Meanwhile, the Buyer runs the financials through every valuation methodology and pricing equation model available, and creates printouts.

The Buyer then returns with the low-price printouts and other ammunition. He explains how he could use the Seller’s help to keep the sale moving because his financial advisors could not justify the Seller’s price. The Buyer does not argue price. He asks for help from the Seller to review and discuss the Buyer’s computer printouts.

The Buyer “teaches” the Seller by explaining how “professionals” value a business and establish price. After several hours and some token adjustments for the Seller, a lower price is arrived at. The Buyer leaves with an agreed-upon lower price. The Seller now thinks that the negotiations are over. Later, however, the Buyer comes back and asks for more concessions.

There are a number of ways in which this scenario can play out. The Buyer may give the Seller one or more reasons for renegotiating. Here are a few possibilities: 1. The deal does not meet the rate of return his company requires, 2. Each deal the Buyer’s company is involved in, including this one, must now compete for limited capital, 3. Inventory does not check out, and 4. Receivables don’t seem as solid as the Buyer previously thought.

The all-cash deal the Seller envisioned may not be possible now. In fact the Buyer may expect the Seller to stay on board and run the business after the sale. Not what the Seller envisioned at the first meeting.

Dealing with the buyer’s advisors, seller’s advisors, landlords, etc., is time-consuming and costly for a first-time seller. The seller may end up devoting an enormous amount of time to a bad deal that can actually damage the company.

From 85 to 90 percent of middle-market businesses have never sold a company. Many professional buyers look at 300 or more companies each year. Sellers should know that companies sell for high multiples when major factors are present. There are many factors. Here are some of the most important:

• The seller’s company’s financials are in order.
• The seller is partnered with professionals, including an experienced business broker, who will advise the seller and guide the process. Bad advice can cost a lot.
• The seller gives no asking price when going to market. (He who mentions price first, loses.)
• There are multiple aggressive buyers pursuing the seller’s company at the same time.
• The seller and her or his advisors have a thorough understanding of deal-structuring and offer-analysis.
• The seller knows that the buyer and the buyer’s representatives and advisors are not the seller’s friends. They may be friendly, of course, but they are not friends.

Note: The scenario and information presented on this page is a compilation of case studies and
articles published in the mergers-and-acquisitions industry.