When representing business sellers it is important to recognize that this is usually their first and only experience in selling their business. No matter how smart they are, there is no replacement for experience in this complex process. Also, any mistakes made during this process are usually very expensive, time consuming or both. Finally, it is usually an emotional roller coaster for the owner:
"Am I doing the right thing?" "Is this the right time?" "What is going to happen to my employees and my customers?" "Is this the right buyer?" "Are these the best price and terms I can get?"
Preparing You, the Seller
Because this process is so foreign and the emotions run so high, a seemingly simple action on the part of the buyer, if not anticipated and not prepared for, could disrupt or even blow up a mutually beneficial transaction. If our client gets surprised by a deal event and that event does some damage, I take that on as my responsibility. It takes only one deal to blow up to turn you into a serial client preparer.
To improve our odds of deal completion and success we make sure our clients are prepared for each stage of the deal, from the number one question, "Why are you selling?," to the conference calls, corporate visits, frequently asked questions, letters of intent, buyer negotiations tactics, post-closing adjustments, etc. The way we do this is every time we encounter something during a deal that our client should be prepared for or could cause an issue if not properly handled, we write a short article about it. Then when we are coming up on a particular deal element or deal stage, we send our client the article to read and then we discuss it with them. This is, very importantly, not reacting to the emotions during the heat of battle, but more like a run-through practice prior to the big game. The team usually does better if they are prepared for the fake punt rather than experiencing it with the score tied with two minutes to go in the fourth quarter. So our dry run is done with no pressure, prior to the event and, most importantly, with emotions in check.
Still, An Unexpected 'Gotcha'
Just when I think that I have seen all the "gotchas" there are after 15 years of grinding out deals, and that my article library was complete, we had a new issue come up which caused several hours of nervousness within the seller's team and the buyer's team.
We had all of the major deal terms worked out and detailed in a very comprehensive letter of intent and were requesting that the partner sellers countersign it to agree to go into a quiet period and buyer due diligence. One of the partners was completely on board, but the other could not get his head around not retaining all of his owner perks: company lease on a luxury vehicle, fully paid cell phone, home internet service and a few others. For his future employment with the new company, those would be handled at a much less generous and customary employee expense treatment.
Good 'Old-Fashioned' Emotions
I was a little taken aback by this and my first thought was, "Is this guy going to blow up a deal for what amounts to less than one half of 1% of deal value?" Then I remembered why we have written all of these articles. In the heat of battle, this guy was dealing with all of the emotions of turning his clients, employees and even a good part of his identity for the past decade, over to a new caretaker. I really could not blame him for not displaying some good old-fashioned emotionally detached logical thinking. What I had to do was to step back and see if I could provide some solid logic so that he would get beyond this potential deal breaker (while I was talking myself off the ledge as well). It went something like this:
"Bill, remember in the memorandum where we made all of those adjustments to remove owner perks from your financials and applied those adjustments to increase your EBITDA. Well, those were very powerful because the buyer looked at those expenses as being eliminated after he owned the company, and when he applied his 5X multiple to your adjusted EBITDA, it resulted in an increase in your sale price of 5X your eliminated expenses. Now, if you want the buyer to incur those expenses once he owns the company, will you be happy with an adjusted purchase price reduced by 5X those expenses? Believe me, you are much better off with multiplying the perks by 5 and receiving that bump in transaction value."
Overcoming the Hurdle
It was beautiful, logical and insightful, but at the end of the day, his partner was the one who actually convinced him to take the deal. But, at least I have another article, a little more wisdom, a couple more gray hairs, and a solution to preventing this from happening on the next deal.