We often receive calls from business owners who have been received an unsolicited approach from a potential purchaser, wanting advice on the offers that have been tabled. This approach has often kindled an interest in or desire to sell the business, so the enquiry may also be to look at other options.
What the unsuspecting business owner does not know, is that there are many experienced buyers who prefer to bypass businesses listed by professional advisors for one key reason: they are out to make a purchase of a good business for the lowest possible price, so prey on the inexperienced would-be vendors who wouldn’t know a good deal if it came up and smacked them on the nose.
I had a response to an advertisement recently illustrating this exact scenario. The prospective purchaser thought I was the business owner and was effusively selling their capabilities and interest in the opportunity, only to go stone cold when informed that I was the vendor’s advisor. “We don’t deal with brokers”, was the reason. I wonder why that is?
So begins the process. There is some courting, enthusiastic discussions around potential synergies and high ballpark expectations. The business owner is feted by the purchaser and made to feel emotionally linked to the idea of selling to this particular organisation. The discussion moves to transaction structure, with animated selling of the “low upfront payment plus long-term earn-out” concept and constant reiteration of what a great deal it is for the vendor.
The bait has been taken by the little fish: now it’s time to reel it in.
A Heads of Agreement or Terms Sheet is drafted, outlining the basic terms of the proposed deal and executed by both parties, thereby committing the vendor into the expensive and time-consuming due diligence process. Often there won’t be an out clause for the vendor, only the buyer, who has terms such as “subject to due diligence” and “subject to finance” littered throughout. Due diligence then offers the purchaser the exclusive opportunity to review all of the business’ records and IP, taking every effort to uncover elements of risk in the business to drive down the price.
By now, the business owner is so emotionally committed to the process that it becomes very difficult to pull out. The process has become harrowing and is taking up a lot of time, so instead of hitting the brakes, they hit the accelerator instead to get to a speedy conclusion.
Contracts are drawn up – by the purchaser’s legal team – and are often heavily weighted in their favour. Earn-out requirements are either onerous or vague and open to abuse. But at this stage, the owner is beyond caring and just wants it all finished as soon as possible. Naturally there will be some compromises as part of contract negotiations, but not to the extent that the vendor now has a good deal.
End result? A business owner who wasn’t even on the market, who has sold off their major income-producing asset for a fraction of its true value. And a buyer that has picked up an absolute bargain.
Naturally this is an extreme example, but should serve as a warning to business owners who receive a direct approach.
If you find yourself in this situation, immediately hire an experienced advisor or two who can protect you from unscrupulous practices and ensure that if a sale is what you really want, that you get the best possible outcome. It will in most cases be ideal to have a number of purchasers vying for the opportunity, so engaging an experienced intermediary should be top of your list.
Andrew Cassin is an Exit Advisor and Business Broker licensed in Queensland, New South Wales and Victoria. His company, Acquisiti is premium business brokerage and advisory firm, providing services aimed at maximising the exit result for its clients. Andrew holds a Bachelor of Business and has pursued post-graduate studies in financial services, corporate governance, mergers & acquisitions, and change management. For more information contact Andrew via email at firstname.lastname@example.org