Mergers & Acquisitions Advisory

A Neumann & Associates, LLC

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.

Bottom-Fishing

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.

Financing Issues

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.

Adversarial 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 info@neumannassociates.com

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Client Testimonials

“Working with Marc and his company was a pleasure. 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. Marc handled most of the interaction and he has one of the greatest demeanors. Again, it was a pleasure working with him and his firm.”

Douglas DiCeglio

“I recently completed an acquisition using A Neumann & Associates. Tony Valentino was very helpful and accessible during the entire process. They do a thorough job vetting both parties and got us to the finish line.”

Srini Mudambi

“Claus out of Florida helped us with the sale of our business. We had never done anything like this and him and his team walked us through the process from start to finish. We had some challenges through the process and Claus continued to show up even in the difficult conversations.”

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

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James Belanger, Business Owner

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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

“I utilized A. Neumann & Associates to assist in an M&A process. They are VERY thorough in using their time-tested process to calculate the value of investment opportunities, a process which provided a very detailed explanation for the value of the potential opportunity. Additionally, they also went above and beyond to extend other services including connecting with others who specialize in your industry and can assist with necessary steps including legal and accounting. Highly recommended!”

Edward Lane , Business Owner

“I recently contacted A. Neumann and Associates about getting a valuation of my business done. I spoke with Achim, who explained the process in detail. He had his colleague Gary come to my office 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 when the time comes for me to sell my business for max value. They gave me great insight into the steps I need to take now to get the best deal in the future. I highly recommend this firm to anybody who wants to sell now or down the road. They not only know their stuff, their actually just real nice guys.”

Robert Kardane, Business Owner
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