Series for Business Owners
Most of us have some personal experience with negotiations buying a house, a vehicle or haggling over price at an antique market. The stakes are much bigger with the sale of a business – millions are on the line. Most owners have never been through the divestiture process before and, in many cases, the buyer has purchased multiple businesses. As a result, many privately held businesses are sold well below fair enterprise value.
Business owners can still level the playing field by taking the following steps:
First and foremost, before even opening discussions or signing an NDA, owners should research the background of the purchasing company and the key individuals involved. In many cases, they will be dealing with people they have never done business with before. Strangers. After negotiations commence, care should still be taken to disclose information selectively withholding sensitive information until late the process or in due diligence post offer acceptance. These steps reduce the risk of predatory buyers who may be more interested in accessing the company’s customer list than the actual purchase itself.
Owner Pace not Buyer Pace
Properly managed, it typically takes 6-9 months to sell a business. The key steps include preparation of information documents and supplements, identification and screening of buyers, negotiations, pre-offer due diligence, offer acceptance, post offer due diligence and completion of purchase agreements. While important to keep discussions moving, owners need to manage these discussions at their own pace and not allow the buyer to pressure them into making any decisions.
The purpose of the information document and related supplements is to provide the prospective purchaser with an overview of the transferable business to justify value. It is therefore, by nature, a selling document. But owners are well advised to also inform possible buyers on areas that can be improved early in the process. This forms the basis for representative discussions on enterprise value – better the buyer find out early than make an 11th hour reduction to proposed price when the purchase agreements are about to be signed.
Once advanced negotiations begin there is inevitable back and forth not just on enterprise value but a host of other conditions on the offer under consideration. Even when a letter of intent is signed and the parties agree to terms, negotiations continue through numerous purchase agreement clauses. The most important thing for business owners to remember is, once they have agreed to a specific item, unless it is impacted by some other revision, they should honor that commitment. The same principle applies to buyers. Failing to do results in a breakdown of discussions in good faith. Once trust is lost, the entire transaction can often unravel. The route to closure is paved with mutual respect.
Be Prepared to Walk Away
Worthy of nomination at the Oscars for Best Fictitious Screen Play, one of the most common tactics to reduce price is for a buyer to suggest if their ‘best offer’ is not accepted, they will be forced to ‘look at another deal’.
Fine. Let them go. Before they do, make sure they understand discussions have been officially terminated and the confidential material is being recalled. Owners can now focus their attention on other buyers who are not attempting to pay distress sale prices for perfectly healthy businesses.
Securing a fair offer is inextricably linked to controlling the divestiture process in every phase. That control should justifiably reside with the men and women who built the business.
Rincroft facilitates the divestiture of medium sized businesses. Our clients are companies which are well established and profitable. Since its inception, our company has completed the sale of more than 50 business across a wide range of industries. We also provide advisory services assisting owners in building sustainable value even if they have no immediate plans to sell.