You Have a Potential Buyer for Your Business – BEWARE!!

If you are thinking about selling your business, you certainly have many things to think about. The process of selling a privately held company is a complex unique experience and, if managed properly, can result in an extremely rewarding transaction that fully meets the goals of both the owner and the firm. Good news – you have a potential buyer that has approached you or an industry player you already know who has expressed interest in acquiring your firm. Bad news – this can be a double-edged sword insomuch that (if not handled properly) it could lead to disaster in the form of wasted time, vanished confidentiality, a bad deal, and a compromised company.

As Achim Neumann, President of A Neumann & Associates, LLC. and one of the foremost respected M&A advisors on the East coast, says in his 2017 book entitled The Road Beyond – What Nobody Tells You About Selling a Midsized Business, “the concept of “doing a deal” directly with a buyer who is right in front of you might be enticing and perceived as a great way to save time as well as broker’s commission, however, the truth is that approach is fraught with potholes and will most likely wipe out any assumed savings of time and money.”

What most sellers do not realize is that there are plenty of buyers out there – over $3 Trillion waiting to be invested by individuals, firms, and private equity groups. Take your time and do not be pressured. If your buyer cannot wait for you to properly prepare, then they are simply not your buyer. The perceived ready-made opportunity and “path of least resistance” is not necessarily the best road to take. Taking extreme caution is critical at this point and working directly with a singular buyer that has approached you can often lead to the following significant negative consequences for you and the business:

LOSS OF CONTROL – Simply stated, it is YOUR business and (if you wish to sell) you should be in complete control of the process.  It is not up to the buyer to establish the value of your firm or set the parameters for any negotiations. The moment a seller deals directly with a buyer, they are “on the spot” having to react to an NDA, request for materials and a potential offer.  Make no mistake, they are driving the bus with ALL the leverage, and you are a passenger with truly little leverage or bargaining position – in what could be the most significant financial transaction of your life. Contrast that with a seller who is fully prepared with an independent valuation, full marketability assessment, defined deal structure and professional representation that can put comprehensive marketing materials in front of thousands of buyers.  The latter scenario provides for full buyer qualification, deal selection, and proper negotiations.  Without such, the dangers continue to reveal themselves.

LOSS OF TIME – 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. This is illustrated by consistent and multiple requests for documents, taking their “sweet time” to decide and just simply “dragging out” any type of deal making.  The seller’s attempts to “force a decision” or move the process along by setting any sort of deadlines will erode any small leverage remaining and carry negligible impact because the buyer “knows” there is no other seller.  There are countless examples of this type of elongated dance only to find out months down the line that the buyer was just fishing (or never had the funds required to begin with) and that they are no longer interested.  Since time is money and the most valuable asset we have as we grow older, this is an impossible situation for a seller to put themselves in.

LOSS OF CONFIDENTIALITY – Unlike selling real estate where everything is out in the open and publicly marketed, the sale of a business should be completed in total secrecy as best as possible. The last thing that business owners want is for key management, employees, competitors, or suppliers to find out that the company is for sale. There is no need for them to know their intentions and suffer unnecessary anxiety about a possible change at the top. If done properly, an efficient sale can be executed without any breaches of confidentiality. 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 dire news for the competitive position of the company; for example, there would be little chance for a union contractor to secure government contracts, if it is known that the facility is under sale consideration. Without expert handling of buyers in a confidential manner, a business owner is like a fish out of water running the risk of significant competitive damage and much needless angst within the workforce. Competitors and employees will likely find out about direct negotiations – then what?

LOSS OF MONEY – What is my business truly worth and how much cash will we receive at closing? This is priority #1 for most business owners. To be comfortable with a sale, it is imperative that a clear deal structure be defined and supported BEFORE going into the market. As a first step, a proper accredited fair-market valuation should be performed and delivered to the business owner. Based upon current market factors, the financial performance of the firm, and specific growth potential, an accurate value and precise deal structure can be determined. As part of the valuation, it is critical to have a formal company marketability assessment provided with it. This review will outline both the positive and negative operational factors that drive value and impact the relative attractiveness in the market from a buyer’s perspective. Items such as owner dependency, client concentration, managerial depth, financial record-keeping, recurring revenue, and potential growth opportunities all impact the marketability of a firm. The stronger your firm is going into the market, the more cash you will receive at closing (as opposed to deferred dollars) and the stronger overall transaction can be attained. Bottom line is this – without an experienced team in place and proper preparation, combined with the potential buyer driving the process, there is little chance that a seller will be able to maximize a financial transaction for themselves. The result will most certainly be a deal that leaves money on the table and/or includes “unfriendly” deal components that directly affect the seller’s wallet.

As Mr. Neumann adds, “By its very nature, any type of negotiation is an adversarial process with opposing objectives: the buyer wants to pay as little as possible, the seller wants to obtain a maximum amount of funds. And whereas this might not have any implications for a real estate transaction, it will have a significant impact on the business transfer process. Simply stated, a real estate transaction is the transfer of one asset class with little contingencies. However, the transfer of a business includes many asset classes, and more importantly, has often several contingencies after the transaction (i.e., seller note, consulting agreement, royalties, earn outs, etc.) – for all of which the seller and buyer depend on each other’s good will. Thus, it would not be a smart move to take a direct adversarial stance in the negotiation process, however, not doing so will deprive a seller of the maximum benefit. Only the use of a professional intermediary – as the middleman – will ensure most benefits and facilitate a deal.”

There is certainly a correct way and an incorrect way to sell a business, and it is essential to collaborate with the proper advisors to implement the sale. Professional marketing documents, access to the correct buyers, stringent buyer prequalification, expert negotiation skills, accurate financial reporting, and a thoroughly managed approach are all pillars of a successful and discreet transaction process.

Preparing for and deciding to sell a family or privately held business is a weighty exercise that calls for a thoughtful and proactive approach – fully controlled by the seller. The execution of an efficient sale is a complicated process that calls for experience, discretion, and professionalism. The legitimate concerns of a seller must be addressed and their interests always protected. Determining the ultimate deal structure with cash at closing defined, preserving confidentiality throughout the process, and maintaining the cohesion of the organization are paramount priorities. If a buyer presents themselves, great. There are hundreds if not thousands of similar out there. There is no rush. Proper preparation and an experienced M&A team will go a long way to alleviating any fears involved with a sale of the business – saving time, continuity, and money in the process.