March 24, 2020
Should I Deal Directly with a Buyer?
By Achim Neumann
Absence of Proper Buyer Qualification Process
When selling a business, the importance of performing a comprehensive buyer pre-qualification assessment before getting down to serious negotiations cannot be overstated. It sounds obvious, but a process which investigates the buyer’s investment/income criteria, management qualifications, decision time frame and financing is necessary to ensure that a sale will not hit any insuperable obstacles at a later date. Below are multiple instances of why a deal will most likely fall through without the assistance of an experienced M&A specialist.
Breaches of Confidentiality
If it becomes public knowledge that a company is up for sale, the competitive position of the company that allows it to continue trading in the short-term may be compromised. An example of such a case may be one in which the prospective sale of an airline leaks into the public domain, causing the company to lose potential customers who are put off from buying tickets due to fears about disruptions to flights that may result from a future takeover. Buyers should take care to sign a comprehensive non-disclosure agreement at the outset of negotiations, since his/her negotiating position will be undermined if the door is opened for competitors to exploit uncertainty among the company’s client base as they look to encroach on the company’s market share.
Lack of Urgency
Buyers who sense that they are the “only game in town” often have a tendency to try and exploit their perceived negotiating position and drag their feet and wear a seller down. This strategy typically takes the form of time-wasting tactics, such as multiple requests for documents, slow decision-making, and backtracking on issues that have already previously been agreed upon. Any ultimatums given by the seller as an attempt to push through the transaction are likely to be met with resistance because the buyer knows there is no other seller with whom they will be forced to compete.
Sellers should be aware of the existence of certain speculative buyers that go out of their way to pounce on struggling businesses that they believe can be acquired for less than their market value. When dealing with such buyers, obtaining a fair price will prove a major challenge even if a third-party accredited business valuation report has been carried out and presented to them. Opportunistic buyers may simply discard the validity of such a report, and without the advice of an experienced business broker, the seller may not possess enough know how or confidence to stand by their own original valuation of their business.
Most buyers will look to finance their business acquisition with a bank loan that will typically account for around fifty percent of the asking price. Sellers should be aware that although many buyers will try to strengthen their bargaining position by claiming that they already have the requisite financing in place, it is common for them to later concede that their funding sources are dependent on certain contingencies and are not as secure as they first made them out to be. In the event that a buyer has been dishonest about their funding, lengthy delays may result which greatly increase the probability that the deal will ultimately fall through. A lack of buyer transparency regarding financing can put the seller in an awkward position when he/she is forced to request further proof of a buyer’s capacity to close the deal at an advanced stage of the process.
Negotiations are, by their very nature, adversarial processes in which both parties are informed by opposing objectives: the seller is looking to obtain the highest price, while the buyer wants to part with as little money as possible. In a business acquisition, the adversarial process may become heated due to the tit-for-tat nature of protracted and complex negotiations. When itineraries of many asset classes are at stake, each of which may be subject to a number of clauses which will dictate the timeline of events in the post-transaction period (e.g. consulting agreement, royalties, seller note, earn-outs, etc.), maintaining a cordial relationship between both parties during negotiations is of the utmost importance. In rounds of heated negotiations, the services of an experienced business broker to act as middleman will ensure that the working relationship between seller and buyer remains fruitful for both parties in the future.
Seller Negotiation Position
Achieving a favorable outcome in negotiations requires the seller to make on-the-spot decisions about offers and counteroffers. With a broker acting as an intermediary, the seller does not have to have face-to-face interaction with the buyer, allowing them to maintain a degree of emotional separation from the deal. This separation has numerous benefits for the seller, taking the heat off him/her and allowing for more objective decision-making. By taking charge of round-the-table negotiations, a business broker protects an unexperienced seller from being beaten down on the direct sale price or from being forced to yield to unreasonable demands over the structure of the deal.
While it may be attractive to the seller to avoid having to pay a business broker’s commission fees by doing a deal directly with the buyer, in most cases the risk of succumbing to one or several of the pitfalls listed above is high. If this happens, having to settle for a figure below the asking price is likely to counterbalance any savings initially made from deciding to go at it alone, in particular, as the after-tax cost is often less than 4% of the transaction price.
Most brokers are willing to adjust their commission rates for existing buyers, and hiring one will result in a win-win situation for the seller. If the current buyer feels pressured by the presence of a qualified broker and walks, the seller will learn that this buyer was never a realistic candidate to begin with. However, if the current buyer is willing to move forward, the seller should not only come close to obtaining the full asking price, but the transaction is likely to be completed promptly and on time.
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 firstname.lastname@example.org