Thursday, August 25, 2016

Selling Your Business - Beware of the Tire Kicker

If you are approached by an unsolicited offer to buy your company, you might think this a good thing. If not handled properly, it could be a real drain on your company's performance. We are often contacted by a business owner after he has been approached by a buyer. He wants information from us on the merger and acquisition process, which we are happy to provide. He wants to wait, however, to engage our firm to sell his company  "until this situation with the buyer plays itself out."

The Single Buyer's Game Plan

This is the start of the death spiral. I don't want to sound overly dramatic, but this rarely has a happy ending. These supposed buyers will drain your time, resources, focus on running your business and, your company's performance. They want to buy your business as the only bidder and get a big discount. They will kick your tires, kick your tires, and kick your tires some more.

I recently read a great article from a UK Business Advisor, Clinton Lee, that takes a little different but equally cautionary view of this Tire Kicker.

Once You Pin Them Down

If they finally get to an offer after months of this resource drain,  it is woefully short of expectations, to the surprise or chagrin of the owner.  A second potential outcome is that when the offer does come, the owner doesn't know if it is a good or bad offer. Finally, once the buyer has tied up the owner with the LOI, he then proceeds to attack transaction value through every step of due diligence. He is the only suitor so there is nothing to stop bad behavior.

This is so costly to the business owner. Many owners repeat this process several times before they acknowledge the damage being done to their business. When they do eventually hire a merger and acquisition firm or a business broker, the company value has eroded substantially.

Even though we have watched this situation unfold from a distance many times, we have been frustrated by our lack of success in changing the owner's incurable optimism about this buyer.  Being the deal guys that we are, we needed to come up with a creative solution and a deal structure to move the business owner toward a better outcome. If we feel so strongly that this buyer will not be the actual buyer in the end, we should be willing to "carve out" that buyer in the form of a discounted success fee.

Put the Buyer into a Competitive Bid Situation

By George, that's it! If an owner has an identified buyer, we can incorporate a sliding scale discount on the success fee over time if this identified buyer becomes the actual buyer. If he becomes the actual buyer very quickly the discount is big. If the deal closes after five months of our M&A work, the discount has slid to zero because we have thrown him into the mix with several other qualified buyers and his offer will have been leveraged higher by 25% or more.

The benefits to the business owner with this approach are meaningful. First, if this is that rare occurrence of a legitimate buyer with a legitimate offer, the owner will not pay a big success fee for a small amount of work. Secondly, the owner can turn the burden of the process over to the M&A firm, freeing him up to successfully run his business during the process. Next, we end the endless, resource draining, tire kicking that erodes business value. Finally, by changing this from an auction of one to a truly competitive bidding situation involving the universe of qualified buyers, the owner will have no doubt that he got the best the market had to offer for his business.

Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist

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