Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

April 8, 2014

A Failed Direct Deal?

By Joseph Eneldas

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Quite often our firm is hired to establish a value for a company through an independent accredited fair market valuation, but then we find the company’s owner attempting to sell the company on his own.

“The concept of ’doing a deal‘ directly might be enticing and perceived as a good way to save a broker’s commission,” says Achim Neumann, President A Neumann and Associates, LLC, New Jersey. “However, the truth is that the occurrence of any one of a number of events will most likely wipe out any anticipated savings.”

Specifically, there are numerous factors that jeopardize the efforts of a direct sale.

No Proper Buyer Qualification Process

Most often, when we are requested to advise a seller on a transaction “who currently is talking already to a buyer,” most often we notice that a formal qualification process has not been conducted; in other words, the buyer’s investment/income criteria, management qualifications (from a lender’s point of view), decision timeframe, balance sheet and bank account statements have not been requested. Further, at best, a one-page buyer Non-Disclosure Agreement (NDA) was signed, and not a detailed NDA as utilized by professionals in their day to day dealings with buyers.

Not only is the seller jeopardizing confidentiality through the lack of a proper NDA, he is doing so with a “buyer” who may not even be able to execute a deal, and the buyer will never know this until the deal reaches the closing table.

No Sense of Urgency

Another significant issue is, that if buyers sense they are the “only game in town,” they will typically take their time to wear the seller down on price and other terms. This is characterized by consistent and multiple requests for documents, taking his “sweet time” to decide on every issue, and just simply dragging out each step toward deal closing.  The seller’s attempts to “force a decision” by setting a deadline will carry little impact because the buyer knows there is no other seller.

Bottom Fishing

Along the same lines, doing a deal directly will make it more difficult to obtain a full price offer from the buyer – even with a third party accredited valuation report. Buyers will simply disregard the validity of such a report, and the seller is often not sophisticated enough to counter in detail the points that the buyer may bring up with respect to such sophisticated valuation report. The outcome is that the buyer will likely only offer a fraction of the true market value.

Lack of Financing

Every buyer uses bank financing to acquire a company, typically for 50% (or more) of the asking price.  We have seen again and again that a buyer relies on our organization to match him with the proper financing sources to obtain such funds, as specific lender risk assessments differ widely between different market segments.

Ironically, the buyer needs to present himself initially to the seller as a very well-funded investor in order to engage with a seller, but will then have to concede at a later stage that he/she does not have the funds for a deal. Consequently, a seller often wastes 2 to 3 months of his/her time until a deal collapses due to insufficient funds. Furthermore, a seller will find himself in a very unfavorable position to request financing details, as the buyer will perceive this as mistrust.

Adversarial Process

By it’s very nature, any type of negotiation is an adversarial process with opposing objectives: the buyer wants to pay as little as possible, while the seller wants to obtain the maximum price.  And whereas this might not have any long-term implications in a real estate transaction, it will have a significant impact in the business transfer process. Simply stated, a real estate transaction is the transfer of one asset class with few contingencies.  However, the transfer of a business includes many asset classes, and more importantly, it often has often a number of contingencies post transaction (i.e. seller note, consulting agreement, royalties, earn-outs, etc.), for all of which the seller and buyer will depend on each other’s goodwill in the future. Thus, it would not be a smart move to take a too direct an adversarial stance in the negotiation process; however, not doing so will deprive a seller of the maximum benefit. Only the use of a broker – as the middleman – will ensure maximum benefits and facilitate a deal.

Confidentiality Breach

When a seller deals directly with a buyer, then he/she clearly signals that they are ready to sell. The mere public knowledge of such intentions can be bad news for the competitive position of the company; for example, there would be significantly decreased chances for a banquet facility to book weddings, if it is known that the facility is up for sale. Competitors will exploit such uncertainty, no question about it, and competitors nearly always find out about direct negotiations. It is a similar situation when the employees or suppliers become aware that the “business is on the market”.  The seller looses leverage with both groups and reduces the goodwill value of the transaction.

Seller Negotiation Position

The moment the seller deals direct, he/she is “on the spot”; in other words, if the buyer puts a proposition forward, the seller has to immediately react to it. With a broker, such reaction does not have to be immediate, and thus, allows for a better negotiation position on each side. For this very reason, we never engage sellers into direct sale price or deal structure negotiations with a buyer.  It simply not wise to allow direct contact between two parties who may be negotiating the most significant deal of their life without proper representation.

In sum, the concept of a direct deal might be appealing.  However, it only works in very few scenarios. As a matter of fact, most brokers will make adjustments in their commission schedules for existing buyers, and it is always smarter to have a dual process.  It’s a win/win:  if a potential buyer with whom the seller is currently dealing direct feels “pressured” by the presence of a qualified broker on the sell side and walks, a decision was (finally) obtained – with this buyer having never been a realistic buy side candidate to begin with. If the current buyer at hand will move forward, however, the seller will not only obtain close to full asking price but will do so in a speedy transaction – most often having received benefits that greately exceed any broker’s commission expense paid in the process.


About A Neumann & Associates, LLC

A Neumann & Associates, LLC is a professional mergers & acquisitions and business brokerage firm having assisted business owners and buyers in the business valuation and business transfer process through its affiliations for the past 30 years. With an A+ Better Business Bureau rating, the company has senior trusted professionals with a deep knowledge based in multiple field offices along the East Coast and has performed hundreds of business valuations in its history. The firm’s competitive transaction fees are based on successfully completing transactions. For more information, please contact A Neumann & Associates at 732-872-6777 or info@neumannassociates.com

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“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Marc, who explained the process in detail. After meeting with Marc in order to get a clear understanding of my business, and what I was hoping to accomplish. His patience in answering all my questions and his knowledge of the proper way to market my business gave me great confidence that this is the firm I will be using to sell my business for max value. Working with Marc at A Neumann & Associates was very easy and professional. I did not know all that was going to be involved in selling my business but they helped me through the process. What I thought was going to be a just another one of those pushy sales companies was just the opposite. Polite, knowledgeable, and a pleasure to talk to and deal with. I highly recommend this firm to anybody who wants to sell now or down the road. Marc not only knows his stuff, but actually is a real nice guy.”

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Srini Mudambi

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Colby Harris, Co-Owner, Del Mar Designs

“Claus Madsen thoroughly helped us with selling our company. From the 1st introductory meeting explaining to us what was possible, to providing us with resources to assist with the sale. Claus was invaluable throughout the whole sales process. Claus was with us every step of the journey and always made himself available for any questions or issues that came up along the way. If you are interested in selling your business, I encourage you to reach out to Claus and the ANA team so that they can let you know what’s achievable. These guys will make it happen!”

Ron Harris, Co-Owner and Vice President, Del Mar Designs

“A Neumann & Associates is the only business broker I would use or consult with. They have assisted with 3 business sales over the past 15 years with me. They are honest and sincere and have always performed better than my expectations. They are the only one i would use for the sales of my businesses.”

James Belanger, Business Owner

“I wanted to take a second to commend the exemplary customer service from both you [Karin Neumann] and Mr. Valentino. It’s both a rarity in the industry, and very much appreciated.”

Andrew G., Investor

“We worked with Neumann & Associates to investigate the purchase of a research company in 2010 and found Achim to be capable, forthright and realistic. His depth of experience enabled us to fully understand our options, offering creative options that might enable the acquisition. While we didn’t acquire that particular company at that time, we know exactly who to call whenever we’re looking to buy or sell a business.”

Daniel Coates, Buyer

“Purchasing a business through this firm was a pleasure. Gary was very professional and transparent throughout the entire process. I look forward to working with A Neumann & Associates in the future.”

William Klemens, Buyer
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