June 9, 2019
Is Greed in Business Good?
By Jeremy Albelda
“Greed, for the lack of a better word, is good,” – famous words by Gordon Gekko in the movie ‘Wall Street’ in 1987 – greed, defined as the excessive desire for more than is deserved or required, for one’s own selfish interest and not for the greater good and often at the detriment of other individuals or society at large.
How does greed apply to deal making for privately held mid-sized businesses?
“Greed and one-upmanship are quite often the drivers to kill deals,” says Achim Neumann, President, A Neumann & Associates LLC, a New Jersey based Mergers & Acquisitions advisory and Business Brokerage firm, ”All too often we see situations, where a business seller and buyer essentially recognize a deal being beneficial to them, yet, their respective desire to ‘win’ the last round of negotiations let the deal ultimately break down.”
Generally, once a decision has been made to sell a business, the key information about the business is collected from the business owner, financials and cash flows are re-casted, a business valuation by a third, accredited party conducted, the marketing documents are prepared and approved and a marketing campaign is initiated. Investors are pre-qualified and will review the confidential memorandum for the business, express interest, and thereafter, are being introduced to the business seller.
If there is continued interest on the buy-side, an offer is prepared and presented to the seller, and it’s at this time that initial emotions are triggered.
For one reason or another, a buyer might not offer full price, leaving the seller disappointed. Alternatively, the seller might indeed offer full price, leaving the seller wondering, if the asking price was properly established, or yet a third option, multiple parties might bid the price up, leaving the seller to seek yet another bidder to join in order to obtain an even better price. Whatever the scenario is, it’s at this point when initial opinions, emotions and attitudes towards the other party are formed, and the very basics of greed are often at play!
For example, on multiple occasions, our firm has worked through a long process of due diligence with both parties, only for the seller requesting a (second) valuation of the business to be done by yet a new valuation firm one week before transaction closing – motivated by the seller’s self-doubts that not the best deal was obtained. (Naturally, said second valuations came in within 3% to 5% of the previous valuation)
In a different scenario, the seller’s (emotional) attachment to certain assets was squarely opposed to striking a deal. For example, certain vehicles used by the seller for the business and personal use as represented in the previously approved confidential memorandum, all of the sudden were primarily used for private purposes only – naturally, leaving the buyer to question the validity of the entire marketing prospectus and engaging into a fight about whether the vehicles should be included into the transaction price or not. If one now considers the fact that the vehicle value of $35,000 is less than 1% of the transaction value, then clearly it’s a matter of greed more so than rational thinking.
On other occasions, sloppy work in the initial data gathering process leads to the wrong outcome.
For example, a seller vastly understated the value of the working capital (WC) the business required to operate, specifically, the inventory – whether this was done on purpose or unintentionally remains unclear. Needless to say, the seller expected a significant WC credit adjustment at closing, once the true (higher) WC balance was identified by the buyer. However, the buyer flatly refused any adjustment on the basis that such (higher) level of working capital was historically used to operate the business and working capital was incorrectly represented in the confidential memorandum. (Both parties proceed with the deal by including the higher WC at no extra cost).
In sum, it’s the ‘last minute’ greed that often comes into play and standing in the way of a deal.
Whether, it’s a vehicle a seller wants to keep, a closing adjustment sought or the buyer’s expectation for the acceptance of “the final and best offer”, all set the stage for a deal to break down and viewed objectively, are in no reasonable relationship to deal size, or more importantly, let either party reach their overall objectives.
Rather, on the sell-side, the business owner should “stick to his guns”, clearly define what’s included in the asking price, be at peace with such asking price and set an absolute lowest price to be accepted, but refrain from ‘nickel and diming’ to improve a deal on the back end.
In reverse, a buyer should avoid ‘low balling’ an offer in hopes to ‘get away with it’. No question, it’s fair to obtain the best deal, however, it’s counterproductive to ignore a previously established Fair Market Valuation by an accredited, third party business valuation firm, ‘poisoning the well’ in the process and ultimately not reach one’s own objectives.
Let cooler minds prevail over greed by both parties!
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About A Neumann & Associates, LLC
A Neumann & Associates, LLC is a professional mergers & acquisitions and business broker 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 base 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
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 email@example.com