How seller behaviour can affect buyers and influence value
The sale of a business is a deeply personal event for the entrepreneur and rightly so. It is often the case that sellers are treated like royalty, since not only do buyers have to overcome the seller’s emotional attachment to the business but convince them that they are the rightful partner to hand over the keys of this attractive asset. This approach of flattery, can sometimes result in inappropriate behaviours from the seller which can at best frustrate and at worst severely irritate a buyer - potentially having an impact to the ultimate deal valuation.
This first in a series of two articles, identifies some of common areas of conflict and tries to convey how the buyer will view the situation, allowing sellers a better understanding of what is after-all an extended game of high-stake poker. It will hopefully better prepare you for what behaviour is expected from you as a seller and drive a more positive relationship with prospective buyers.
Holidays are fun. We all enjoy and deserve them, and no one could possibly criticise a hardworking entrepreneur from taking some well-earned rest. That is of course unless it is in the middle of a divestment process, where a buyer has invested time and money to make it as efficient as possible. Don’t get me wrong, I can well understand the buyer’s mind-set. They have had to contend with the emotional and stressful wrestling match on whether or not to sell their business. They have had to spend months preparing with advisors the Information Memorandum, build a legal data-room, deliver management presentations and answer endless questions from prospective buyers. This soon becomes increasingly tiring and stressful, in which the opportunity of a week or two on a sun-baked beach sounds just the tonic. This altogether very human sentiment however, ignores the views of the buyer.
The buyer will be represented by an M&A executive who is traditionally over-worked and under constant pressure due to the multiple deals that they are juggling. To have entered into diligence they will have had to already convince their executive of the strategic merit to justify the premium value. They will have also had to commit to a target completion date and engage external providers who will negotiate to work within a tight engagement window as part of their fees. The M&A Executive will likely have their own traffic jam of deals in different stages of completion, so will be working hard to park your deal in an otherwise crowded carpark. They will have been pushing hard their numerous internal operational teams (HR, IT, Operations, Quality, Insurance) and external advisors (Legal, Finance, Tax and Property) to complete the diligence and deal efficiently and to the agreed timetable. More importantly (as with most deals), they will no doubt be already frustrated at the relatively unpreparedness of the seller and the growing backlog of unanswered queries, required to meet the agreed timetable.
It is therefore with this alternate viewpoint in mind that a seller’s holiday decision in the middle of a deal must be considered. A holiday will inevitably blow the target timetable. It will lose the interest of buyer’s advisors who due to the lack of deal momentum will move onto other projects and take longer and be more expensive to re-engage, often delaying the timetable by a 2-3 times multiple of the period of the vacation. Regardless of how justified the seller may feel about taking some time out, the reality is that it will be rightfully viewed in the context of delaying or risking the multi-million dollar deal, and little appreciation or sympathy will be offered by the buyer, who will simply view this as being inappropriate and reckless. This is clearly unfortunate if you plan to stay with the business, since this painful experience will certainly colour the opinion of the buyer’s leadership in a critical time of the relationship. Given the inconvenience and extra cost incurred, it will almost certainly lead to a hardening of negotiating stance, which will ultimately impact the exit value.
The key learning is that there will be plenty of time (and money !!) to have a well-deserved vacation after the transaction is completed......holidays happen yearly.....selling a business is hopefully a once in lifetime event....so be sure and delay any holiday plans, commit fully to the deal, and deliver your side of the M&A agreement.
It is common that sellers are sensitive about disclosing key information early in the process. This is due perhaps to the buyer being a current competitor and can be easily overcome by delaying disclosure of key contracts until later in the process or simply redacting certain clauses (ie. prices). There are however occasions that despite these solutions sellers develop an continued level of paranoia denying buyers any meaningful information on the customer contracts or employees.
Again the seller is well advised to appreciate the mindset of the buyer. Regardless of how much the business means to the seller, a buyer’s view on its value is based simply on its key assets – its people and its contracts. It is therefore perhaps understandable that little progress on diligence can be made without full disclosure of these points. Buyer’s are usually reasonable people and can agree for later disclosure of names of customers/employees accepting initially redacted or anonymised information. Since this is a simple enough concept, the seller’s continued paranoia can deeply frustrate buyers who have already invested their valuable time, money and usually personal reputation to justify the target’s premium value, and ultimately this can lead to the push back of the deal timetable and a hardening of negotiating stance, which will ultimately impact value.
The key learning is that while it is understandable to be protective of sensitive information, you should be fully led by your advisors on how and more importantly, when to introduce this into the process to ensure deal efficiency and maintain negotiating strength.
At Red-Swan Partners our team have extensive experience from growing and selling their own businesses, being TIC corporate’s M&A executives, as well as working with a wide range of TIC business owners to support them in the development of their own exit strategy. This wealth of relevant market experience allows us to work with business owners at any through their life-cycle and to best advise how to behave during a divestment to ensure you can achieve a premium value for your business