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5.14.99  
What to Do When Your Suitor Starts Slashing the Bid
Excerpts from How to Sell Your Business — and get what you want!

You have an agreement in principle to sell for $12 million in cash. The buyer has been arranging financing and performing due diligence for eight weeks and makes an appointment to see you. The buyer's accountants disagree with the way you have treated certain entries, and they think last year's income was overstated by $350,000 (a similar discussion can arise from a reduced estimate of the current year's income). Their price was based on six times the earnings before interest and taxes, and now they propose to reduce the price by six times $350,000, or $2.1 million.

White-knuckle time. Perhaps you will wish that you had not told so many of your family and friends about the pending sale. Try to understand the reasons for the change. Have investors or the bank declared the price excessive? Much leaks out because there are so many people involved. Now you will be rewarded for good communications. You should know the key milestones where a price change could have been triggered: Getting commitments from investors, board approval, or obtaining a bank loan. Try to figure out what happened.

Emotions can boil to the surface when a trusted buyer drops the price. You might feel cheated, betrayed, or manipulated. You want to tell them they acted badly -- or worse. Be careful. This buyer had a strong initial interest. This step may have been forced on the people you've been dealing with by a superior you've never met, or a banker or an investor. It may be a ploy. They may want to go ahead at the original price if this move fails. There is only one way they can find out if you would go ahead at a price 20% below that in the letter of intent. And they have to appear to mean it. Restrain yourself: don't say things you might regret. They may come back and offer 5% below the original price, and you may want to accept that.

Now you will be happy if you've told the buyer that other suitors exist. (Don't mention names -- the unknown are more threatening.) You must let them know you have acceptable options. You will be happy if you have taken steps to minimize the feeling among your employees that the deal is a foregone conclusion.

HOW TO RESPOND. Your answer to the new proposal is that you need time to think about it. Take at least a week. If they want the deal, they will begin to sweat -- and you will see signs. Someone will call you. Perhaps a go-between seeking information on their behalf -- it could be a lawyer or an accountant. Tell them to stop the due diligence, and remove their people. If you have another strong buyer, you could ask for all your confidential papers to be returned. But do not play this card lightly. Alternative buyers will present new uncertainties, and your best outcome might still lie with the original suitor.

How valid is their reason for reducing the price? This is relevant. If you have just lost a customer who represented 40% of your business, they have a point. But if it is something that has no bearing on future profits, then they may not. If you conclude that you still want to try to make a deal with this buyer, take several days to think about it. Then ask if there is room for negotiation. Some point between their new price and the original price may seem like a logical place to compromise.

THE ALTERNATIVE BUYER. Recognize that attrition rates are high for acquisition talks, and keep friendly with all those seriously interested in the business. Before talks founder, you may sense that trouble lies ahead. The buyer is expressing concern about the quality of earnings or the prospects for the business. You feel you're being prepared for a price reduction.

Now it would be nice to know how the other buyer you spurned a month or two earlier would deal with the issues that have arisen. Find out if you can -- a broker can do this more readily than you -- how aggressively interested they are in your business. Some buyers will take the position that you should finish your talks with the first party before they will get involved. Others will sense an opportunity and readily jump in and try to be competitive. Do not rely on what they said a month or two earlier. Then they might have been pursuing another company, and were therefore preoccupied.

Providing data is key. The second buyer is not going to be able to address price and other issues without all the information. Your letter of intent may preclude "talks" or "negotiations" with others. This is a good reason to have provided data to more than one buyer before entering into a letter of intent. A shrewd seller I knew had an agreement in principle. He also had an alternative buyer. He kept sending the monthly financial statements to the alternative buyer, and kept the parties apprised of where he stood. He was not negotiating with him, he was keeping him warm. When the first deal fell apart, he was able to switch to the second buyer easily.

If your first buyer is now suggesting a deal different from that outlined in the letter of intent, your obligations not to talk to anyone else are over -- dead. The week or so you take to mull over a lowered price is an excellent time to have talks with an alternative buyer. This works best when the alternative buyer has visited you before you signed an agreement in principle.

Switching buyers is an emotional wrench for many sellers -- and surreptitious talks feel unseemly. Do not succumb to the temptation to brag about a second buyer: if the alternative talks turn out to be fruitless, you'll be weakened. But leaks occur and may help. If the first buyer still wants the deal, plans to drop the price may be tempered. Keeping other suitors in reserve, and acting promptly if the terms of the letter of intent have been breached by delay or change, is the best protection against price changes.

Colin Gabriel (cgabriel@optonline.net) is a business broker in Westport, Conn.

Reprinted with permission from
How to Sell Your Business -- and get what you want!
by
Colin Gabriel
Copyright 1998, Colin Gabriel
Published by Gwent Press Inc., Westport, CT
Adapted with permission of the author and Gwent Press.
Title available from bookstores, online retailers, and by calling 1-800-964-1902
See Contents at
http://www.bookzone.com/bookzone/10001010.peek.html

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