Unless your company is one of those must-have, breakthrough, technology companies with buyers crawling all over you, you are subject to a process that greatly favors the business buyer. This is part one of a three-part series that will identify the natural advantages that business buyers bring to the table before the transaction process even starts. Parts two and three will focus on the marketing, due diligence and contract negotiation process. I will discuss the buyer's constant attack on transaction value and approaches you can use to hold your ground against this formidable opponent.
If the buyer is a private equity group, they buy companies for a living. They will have acquired dozens of companies prior to entering the competition for your business. If it is an industry buyer, they likely have an individual or department whose sole function is to look for business acquisitions. For most business sellers, this is their first and only rodeo. What you don't know will definitely hurt you, or at least cost you.
Buyers have an experienced deal team. Do not go it alone. Hire an experienced M&A advisor to help you. Not only for the packaging and marketing of your company, but for defending the value you thought you were going to receive at closing. Make sure you get an experienced deal attorney at the contract stage to counteract the incredibly one-sided agreement that the buyer's team will present.
I know this will come as a shock, but yours is not the only business the buyer is seriously evaluating for acquisition. For private equity buyers, they generally look at about 100 companies for each one they buy. They will have several deals in the queue, along with yours, to give them plenty of options, to leverage one against the other, and to reduce emotional attachment to any one deal.
The seller needs to identify several qualified buyers and process these buyers in parallel. If the seller tries to sell his/her company on his/her own, he/she can usually only process one buyer at a time in a serial process because of all his/her other duties running the company. If a buyer knows he/she is the only buyer, count on bad behavior - inability to tie him/her down on a firm offer, missed time commitments, delays, endless information requests, and on and on. If, however, you have been able to attract multiple buyers, your negotiating position is strengthened and you can offset these buyer tactics.
Buyer Controlling the Pre-LOI Negotiation
It is not uncommon to hear something like this from an experienced buyer, "Well, last year you had a spike in profitability. I am just going to use the average of the last three years as the basis for my offer." Seller response via advisor: "It makes no sense to try to negotiate at this level. We just say, 'Feel free to slice it any way that works for you. At the end of the day, if that approach makes your offer not competitive, you will eliminate yourself from the competition.'"
A buyer getting you off the market with a loosely worded LOI that allows him/her to "interpret the terms" in his/her favor deep into the due diligence process, and a seller not counter-signing the LOI until the terms are defined, are additional considerations that can swing a transaction value significantly, and will be covered, each one individually, in part two of this series.
The key here is to recognize the great disparity in the experience levels of the normal buyer team and the unaided seller. I am not saying that doing an M&A deal is rocket science, and most of our clients have the business acumen and intelligence to run that process. The problem is that, for most sellers, this will be the one and only time they will ever go through this process. Learning on-the-fly with a multi-million dollar transaction at stake, going against an experienced buyer in a zero sum game (every dollar he/she gets is a dollar you do not get), is a very costly education.