VOL. 128 | NO. 76 | Thursday, April 18, 2013
Selling the Business: Games Buyers Play
By VERNE HARNISH & MICHAEL SYNK
Entrepreneurs work years building up the value in their business only to give a big chunk of it away when it comes time to sell. Why? Savvy acquisition teams have a method for them wearing down so they sell at a steep discount.
The buyer offers an insanely large price for the business and suggests the deal can close in weeks. The offer will be 50 percent to 200 percent more than what the entrepreneur thinks the business is worth. It looks like the deal of the century.
Buyers do this to get owners to drop their guard. Nothing builds a temporary relationship faster than offering a premium price for the business.
It also gets entrepreneurs dreaming about the life they’ll lead what they’ll do after the deal is done.
Buyers also do this to get sellers to sign an exclusivity agreement that keeps them from talking with other buyers for six months of due diligence – which they promise will go quickly and never does.
Once the document is signed, buyers will drag out due diligence for months, while promising that it should be wrapped up shortly.
As due diligence gets dragged out and because the selling price is tied to a multiple of EBIDTA, the CEO starts putting off key expenditures that he would otherwise make to keep the business growing.
The buyer starts disrupting the entrepreneur’s life by calling “emergency meetings.” The evening before an entrepreneur departs for a vacation or a trade show, the buyer will call to say that there’s a problem with the deal and demand that he show up for a meeting the next day to straighten things out. The frazzled entrepreneur cancels plans at the last minute. The family and business team start pressuring the owner to get the deal done.
With the entrepreneur mentally checked out of the business and worn out from lost vacations and the grind of due diligence – and the business suffering from a cutback in expenses to pump up EBITA – the business suffers a slump.
The buyer uses this as a lever to drive down the price at the last minute. Beat up, the entrepreneur gives in to all kinds of last-minute demands and concessions affecting the final price of the business.
How do you avoid this – and still sell your business? Don’t let one buyer call the shots. Enlist a good business broker to set up an auction for you (no time for amateur hour). One client identified 23 strategic buyers, of which seven came to bid for the business.
Limit exclusivity agreements to 30 days and require a big deposit – say $250,000 – that is forfeited if the deal isn’t completed in that time. Get your “due diligence” package together in advance to speed up due diligence.
Finally, insulate yourself from the transaction. Have another trusted executive work with your broker as a go-between with the buyer, so you don’t get distracted from leading your team. Push back against last-minute demands for meetings.
Overall, keep your head in the game and keep running the business as if the deal isn’t going to happen up until the moment you cash the final check.
Verne Harnish is the founder of Gazelles. Michael Synk is the founder of In-Synk and is the Gazelles coach in Memphis. Contact Michael at firstname.lastname@example.org.