In this article, we’ll provide an overview on Seller preparedness, expectations, and mindset.
Seller Impact on a Written Agreement
When a letter of intent or purchase agreement is submitted, it is based on information and conversations provided. If that information is incomplete, contains a lot of “ballparking” or “guestimates,” omits material facts, or contains errors or imprecise language, issues will surface and lead to repricing or failed transactions that can cause Sellers considerable stress.
Front-Loading Information
That said, the more the Seller can embrace an up-front mentality that includes thoroughness and transparency, the greater the chance of success. Here is a partial list of information that could be provided to a Buyer. This information should be assembled into a data room prior to the listing going live.
- Listing: Public summary of the business including high level sales and profit numbers, asset and inventory values, employee count, lease figures, customer concentration issues, owner’s role and reason for the sale, ideal buyer
- Post-NDA: CIM (Confidential Information Memorandum or business summary) and summary reports
- Meetings: Details on operations, Owner’s role, Buyer’s plans, training and transition, deal structures
- Due Diligence: tax returns, detailed reports, credit card and bank statements, responses to the Buyer
Foot on the Gas Pedal
When selling a business, the Seller must continue to run the business and maintain solid performance. This can be challenging on top of the demands of the sale. Declining businesses are much less likely to close, and if they do, will put considerably less money in the owner’s pocket. After the close of every month, Buyers will demand updated income statements. Pre-closing meetings will cover topics such as updated financials, backlog and forecasts, details of an owner transition or owner employment agreement, succession strategy, retention plans, anticipated staffing changes, timing of changes to be implemented by Buyer, communication plan to employees and key customers, account transfers and logistics
Selecting the Buyer: Given this level of commitment to a Buyer, the Seller should have an idea of the ideal Buyer and minimum skills and traits. Prior to a signed agreement, part of the Seller’s role is to assess the Buyer’s background, mindset, concerns and where they will need help from the Seller. The Seller needs to make determination as to whether or not they can support this particular Buyer’s success.
Select a Good Buyer, Then Support Them
As thorough as a Seller may be, there are always things that will come up that require the Seller to provide more information. Buyers are unique and may make unique requests. Business events or external events that occur during the process may require Buyers to act conservatively to ensure they don’t make a bad investment. Even after a thorough investigation, Buyers must take a leap of faith when committing to an acquisition. They will only take the leap if the Seller has instilled trust and offered a transition that makes the Buyer feel the Seller is looking out for the Buyer.
Due Diligence: While the statement “a proctology exam from both ends” is technically dubious, it is used to describe the due diligence process. Sellers must understand that they know everything about the business and the Buyer knows nothing. Buyers must work hard to feel like they know enough.
Seller Add-backs: Some Seller add-backs (perks) communicate to the Buyer that those items will not be an expense when the Buyer owns the business. An owner staying on as an employee should not necessarily expect health insurance, owner bonuses, profit-sharing, auto, cell phone, meals, travel etc. or similar compensation to what they paid themselves.
Buyer Add-backs and Lender Add-backs: Buyers may disagree with Seller add-backs, thus changing the adjusted net profit upon which they base their offer. Lenders will base their loan commitment upon their own conservative add-backs.
Minimize Re-Negotiations
All of this up front work is done to minimize heartache, improve the chances of a successful sale, and lay the groundwork for a successful transition and potential working relationship with the Buyer. Some of the biggest deal killers after a signed agreement are legal/contractual disagreements and re-trading (changing price and/or terms).
Working with Legal Contracts and Attorneys: Buyer and Seller should settle negotiation points, then involve attorneys, in that order. Attorneys must be business transaction attorneys.
While negotiations can take place at any time during the process or all through the process, 1) there are certain times when negotiating is more appropriate and 2) there is an appropriate amount of negotiation before things go sideways.
Appropriate Times to Negotiate: 1) Prior to a written or verbal agreement, 2) Upon the discovery of new information, 3) When the other party initiates a negotiation
Inappropriate Times to Negotiate: 1) After a written or verbal agreement absent any new information, 2) Upon receiving everything you asked for.
There may be some rare exceptions. For example, either party’s situation has changed significantly causing the initial agreement to no longer be feasible. At this point, any changes must be done within contractual guidelines and obligations or with permission of the other party.
How Financial Buyers Think and Behave: Some unscrupulous Buyers will make enticing offers to lock up Sellers and then re-trade (change price or terms) during due diligence with little justification, causing some worn down Sellers to concede. Most professional Buyers will only re-trade upon discovering new material information that any Buyer would consider as an issue. It is not uncommon for Buyers to consider Accounts Receivables or even inventory and cash to be included in their offer. All of this is fine when the terms are spelled out up front.
Discarding the Buyer
When things get rocky, an owner may be inclined to stop working with a Buyer. Even if this can be done without breaking any contractual obligations to sell the business, a Seller would be wise to pause and sleep on such a decision. Many Sellers overestimate their ability to achieve a comparable or better outcome by going back on the market.
The Big Picture and the Small Stuff
It is important to consider the bigger picture of the deal and its impact before sweating the small stuff. If a deal on a dream house falls apart because of who keeps the washer and dryer, was the trade-off worth it? In a business sale, if the offer price and terms are generous or fair, but the employment agreement offered the Seller is less than what the Seller was used to as an owner, the Seller should consider the big picture. The Buyer is ginning off on a big check at closing to the Seller. The Seller may be able to invest the closing proceeds in a money market fund to more than offset their compensation as a consultant or employee post-closing.
The Seller’s Life During the Transition: Seller success depends on their readiness to exit. While a smart new owner will not make any significant changes for 3-6 months, the Seller must understand that the new owner is in control. Depending on what the training and transition period looks like and how strongly the Seller feels about how the business is managed after the sale, the Seller may need to adjust how they screen for an acceptable buyer. Some retained Sellers have good working relationships with their new boss and others do not.
