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Why “Sorta” Wanting to Sell Your Business “Sorta” Doesn’t Work Well in a Full Sell-Side Process

9/9/19 – Keith Carlson

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The current M&A environment has been astounding for business owners seeking to monetize their ownership interests in their businesses. Valuations—typically expressed as a ratio of the dollar amount a business is bought for vs. some measure of financial performance—are strong. Considerations—a measure of how much actual cash is paid at closing vs. other forms of compensation—are higher than usual. Many business owners who have sacrificed dearly, dedicating effort, resources, and many years to building their businesses, are being rewarded very handsomely. Buyers are discovering creative ways to reduce risk profiles for business owners who finally decide to sell. In general, owners are getting paid more and are bearing less risk, which is always a good thing if you are a seller in this particular market.

That being said, selling a business is not easy. The process of selling a business requires a lot of work for both an owner and their advisors if they want to do it properly. The preparation phase for selling a business is arduous; your advisors will ask many questions about your business and will collect a great deal of information to build selling-related marketing materials. Think of these materials as the “owner’s manual” for your business. It should be very comprehensive and provide all the information that a buyer needs to decide a) whether they are interested and b) what they would be willing to pay for it. Advisors will also take this early opportunity to construct a preliminary data room that will be presented to interested parties.

However, the hard work doesn’t stop there. Once an advisor launches into the market with their materials and begins to work with and talk to would-be buyers, an owner must still entertain questions that aren’t addressed in the marketing materials or in the advisors’ early work. Advisors must also host meetings and arrange conference calls, which takes more time away from business owners. This is done in hopes of fielding numerous offers (Letters of Intent) worthy of consideration. The post-Letter of Intent phase is perhaps even more intense; where buyers can, and usually do, make hundreds of data requests and ask many questions to inform themselves on their investment decisions.

The process sounds like a lot of work, and it is. To the business owner, I equate going through these processes compares to working a part-time job while simultaneously running their business. However, a strong advisor will lighten their load dramatically, but there will always be accommodations that need to be made for buyers to ensure that the process runs efficiently. 

Given the current positive market conditions, I have encountered a new phenomenon where more sellers are enamored with “testing” the market instead of truly dedicating themselves to selling their businesses. They want to test value and see whether the valuation “bonanza” that they have been reading and hearing about is real. They pursue market testing in hopes of finding sky-high valuations and they dream of buyers willing to overpay.

While the theory of testing sounds great, the testers unfortunately do not usually fair well. These unsuccessful testers:

  • Do not pace themselves with urgency,
  • Aren’t willing to accommodate buyers,
  • Generally, do not want to concern themselves with all the ancillary activity that arises from the traditional sell-side process.

These behaviors occurs because the tester lacks the perspective that, for most business owners, selling a business isn’t just about the money, but about successful succession, strategy, and liquidity.

Seasoned buyers can recognize a tester as well (and that’s not good for “testing” sellers). A professional, who has looked at numerous deals from a buyer’s perspective, knows what is normal and what isn’t, based merely on impression.  In my experience, I have looked at over a thousand deals per annum, and have seriously pursued roughly one-fourth of those opportunities. Doing this for enough years, I have gained the sense when a seller isn’t fully committed.

Warning signs that you may be dealing with a tester or someone with lack of internal organization:

  • Seller takes long periods of time to answer questions or discuss issues that buyer considers critical.
  • Seller does not make time for brief meetings after buyer expresses a strong interest to buy.
  • Seller attempts to defer valuation-critical questions to the second phase of the process (post-LOI).

A buyer dealing with a tester or someone lacking internal organization is, obviously, not a desirable situation. 

Dealing with this type of seller is undesirable because:

  • A lack of organization is a sign of internal deficiencies. Many buyers do not want to deal with cleaning up deficiencies. 
  • Buyers want to avoid wasting time with pre-meditated testers (e.g., those who plan to test the market specifically seeking a money grab).
  • Most testers are perceived as being only in the test for the proverbial “money grab” and will lack motivation to make reasonable accommodations. Thus, when motivation is lacking, getting a deal completed it is extremely difficult. 

Getting a deal completed is difficult, if not impossible, when dealing with a tester. Just like any negotiation in business or life, all parties need to both give and take; being flexible in order to arrive at a final deal. In these transactions, there are countless areas of negotiation that buyers and sellers must work through to reach a conclusion. A business owner’s motivation to sell their company affects their willingness to compromise on various deal points. Sellers who lack motivation will likely be less compromising. This heightens the risk that a transaction will never close. Hence, seasoned buyers will tend to avoid testers or simply discount the likelihood of the deal itself, thereby giving less attention to it or worse, making a low-ball offer only to see if it gains traction.

My advice to any business owner entertaining the process: Sell your business for all the right reasons and be prepared to commit yourself to the process. By doing just that, you will be rewarded for your years of hard work and sacrifice, regardless of market conditions, assuming you have worked enough on your business to make it attractive (profitability, managed risks, etc.). Also, business owners that are motivated to undertake the process, must be prepared for the intensity that ensues. If not, you could be perceived as a tester and the same repercussions will hold true.