“I Found a Buyer. I Don’t Need a Banker”
These are dreaded, feared words for investment bankers and it’s not the “I don’t need a banker” part that is upsetting. It’s the part where a business owner tells us, almost proudly, that he or she has “found” a buyer for the business, where we really get worried.
Here are a couple of universal truths that business owners may or may not want to hear:
- Finding a buyer is not the difficult part. They are literally everywhere. Finding the right buyers – that’s hard.
- If you are negotiating with only one party – don’t. Full stop. Don’t. You are just giving away money and valuable terms.
- If you insist on negotiating with one party, then you need a banker more than anyone.
To all business owners who have found a buyer, think long and hard before you continue down this path. A big part of what an investment banker does is not just find buyers (that is pretty simple), but find the right buyers. You might think that the one buyer that has reached out to you has all the attributes of a correct buyer, but how do you know? Investment bankers keep many relationships with potential buyers and can apply past experiences and an understanding of how those groups behaved in other sales. Your investment bank will use his or her expertise to add the right strategic buyers to the mix – maybe ones that you hadn’t thought about before. They will ask you to think about what you really want out of a business sale. Not every buyer will be able to provide these things for you.
There is really no better way to give away value than to negotiate with one party. Even if you get a great, even a “blow your mind,” number upfront from this one party, there are so many ways to lose money as the transaction progresses that it makes leverage, as a seller, absolutely critical. Remember, it’s not the amount of money promised to you in the initial discussion that matters, it’s the dollars that end up in your ATM at the end of the day. The only way to fully control the sale process is to have other groups that you can call if things get crazy. And I don’t mean the names of competitors, I mean real parties that are up to speed on the process and are in possession of the same information as the party with whom you are negotiating.
Sometimes we even hear, “It’s OK if I’m leaving money on the table. This is enough.” I am curious if business owners know just how much negotiating with one party is costing them. It can be millions of dollars, usually, around 20% of the transaction value. You don’t need to have a very big company before this becomes real money. Money that could be transferred to the next generation. Money that could fund substantial philanthropic activity. More than just coffee money for my millennial readers.
And let’s say you still don’t care that you are giving money away to the buyer. You will lose the non-monetary negotiations as well. Want a shorter non-compete? Want to be able to leave the business after a couple years? Do you care about hold backs? Representations and warranties? Personal guarantees? You should. These are the non-monetary discussions where an investment banker and a competitive process will make all the difference.
If you have found yourself in this situation or if you are considering beginning a conversation with a single buyer, call an investment banker first. A reputable firm will never charge you for this conversation but they will talk to you about all the risks involved in a one-buyer transaction.