Nearly every time I speak on a panel or to a group of business owners, the question inevitably comes up, “What are some of the mistakes that a business owner makes when selling his or her business?” While there are many, one mistake stands out from the rest – never, never, ever talk to only one buyer when it comes time to explore a sale.
This should not come as a revelation to the business owner, this concept has been drilled into them from the first day they got into business. You talk to multiple buyers for a simple reason, to generate competition to drive the best price and terms for your transaction. Competition (real or perceived – and I’ll get to that in a moment) creates leverage for a seller and ensures the best possible outcome for the transaction. Business owners intuitively know this but for some reason it falls away when talking about the larger sale. I have seen business owners get five quotes for toilet paper for the shop floor to save a nickel a roll, and then turn around and sell their entire business after talking to one buyer.
Competition is not only critical for driving value, but also critical to allowing sellers to negotiate the most favorable, or at the very least, fairest terms. What most sellers don’t recognize is that price is only one element of about 10-15. Depending on the transaction, these elements will ultimately decide how much money you end up with at the end of the day and whether you receive other desired intangibles.
Some obvious issues surrounding “terms” include:
- Structure – for example, is the buyer buying stock or assets? - a poorly devised structure can result in the seller paying additional taxes and minimize ultimate proceeds. It is not the amount that is in the original offer that counts, it’s what you put in your ATM.
- Escrow or holdback
- Duration of escrow
- Survival period of representations and warranties
- Length and extent of a non-compete
- Timing of communication with a seller’s customers – if mishandled, this can dramatically shift leverage to a buyer for any remaining open issues
- Duration to close
- Whether a seller must reinvest in the business going forward
- A seller’s obligations during a transition
- Form of consideration – for example, is it all cash at closing, does the seller have to take back a promissory note, does the seller have to collect receivables, is there an earnout? True story, at a recent bid opening, we represented a seller that was offered $20 million (a very good price for the business) – problem was, it was $2.0 million a year for 10 years.
- How is the real estate involved in the business being handled?
I could go on, but I think you get the point.
So why does this happen? Why does a seller give away millions of dollars by only talking to one buyer? One colleague recently suggested that given the way many people are raised (especially some of us in Wisconsin), it is often seen as “greedy” or “piggish” to go after the “last dollar”. That’s all well and good until that seller realizes that he or she left that “last dollar” in the pocket of his or her buyer. Instead, if he or she wanted not to feel greedy, how about getting what the business is worth and giving some to charity, or to a future generation? Selling your business for too little because you don’t want to talk to more than one buyer is like working for free for the last couple of years you have owned the business. During those years, you built value in your business and your decision to forgo collecting those dollars is like giving them away. We already pay enough in taxes, don’t put a big check in your buyer’s pocket.
I think the real reason sellers don’t talk to more than one buyer is lack of understanding of the sale process or bad guidance. While it might be easy to blame the seller in this case, the blame is likely better placed on the seller’s investment banker, or if he or she doesn’t have one (and shame on him or her for that), their other advisors. When we, as investment bankers, are asked to describe a sale process, we often describe a 7-9 month marathon of sale based activities that likely scares some sellers. While an exhaustive sale process certainly can take 7-9 months, it can also be tailored to the needs of the seller and shortened dramatically. One key point to understand, there is nothing you can do about the last 45-90 days of a process. Any buyer will require a certain time frame for final due diligence, and certainly if you have alternatives, you may be able to negotiate to the low end of 45 days (maybe even 30), but other parts of the “process” can be streamlined. We have run the entire process in as little as 30-45 days. It can be done.
One final point, there are situations where there really is only one, or very few buyers. While this situation is rare, we have sold these businesses. Most buyers in this case are aware of this, but a good investment banker can create the illusion or threat of competition. If there is only one buyer in the world for your business, the deck is already stacked against you; it may or may not make sense to try to pull off the charade that there might be another buyer in the next room. In any event, do yourself a favor and check your offer. We can often give you a quick read in 30 minutes for free.
And on the subject of investment banking fees, we have never completed a transaction where our fees were not more than covered by the results we delivered. Don’t be the seller that is “smart” enough to save an investment banking fee at the expense of leaving millions in the buyer’s pocket.