We have written previously about how business owners can tell if a prospective buyer is serious by watching for certain “tells.” Evaluating a buyer’s intentions is a lot like playing poker, but most buyers provide certain signals that give away whether or not they are truly serious about purchasing a company.
In the same way, owners often give off signals to buyers that may tip off the buyer that the sale or sale process could be problematic. Buyers who encounter too much of a “hassle factor” may walk away from the acquisition opportunity or adjust pricing and terms to adjust for the additional effort – assuming of course that the transaction in question is worth the effort.
In Part 1 of this two-part series, we will explore several warning signals would-be buyers may detect and the potential impact of these warning signals on the transaction.
Warning Signal #1: The owner acts like they are the smartest person in the room. Bluntly speaking, the seller may give the buyer candidate and their advisors the impression that the seller is smarter than everybody else, and as such, that they know more about the deal business (even if they have never done a deal) than the buyer and their team. This perception may manifest itself in an off-putting lecture about the value of their company, the “correct” valuation and transaction structure, and why, notwithstanding the owner’s efforts, the buyer will undoubtedly be able to take the company to the “next level.” And by the way, the owner wants to be paid for all of this so called “opportunity.” Whether any of this is actually true or not, we would suspect that this approach has resulted in a series of “one and done” meetings with buyer candidates. From the owner’s perspective, all of these buyer candidates walked away from the opportunity because they were not legitimate buyers, and the owner will continue to have these meetings until they meet a buyer that understands the opportunity like they do.
Warning Signal #2: The owner consistently churns through advisors and professionals. Rather than work through an issue with an accountant, attorney, investment banker or fill-in-the-blank-here professional, the owner simply replaces the previous professional with a new professional, never addressing the problem with the previous one. We often say, “Two is a trend; three is a pattern.” This turnover in professionals may raise the buyer’s concern, as they generally look for consistency and longevity between an owner and their chosen business advisors. For instance, a spotty history of churned and spurned professionals can make the buyer question whether or not the owner has the tenacity to work through all of the steps necessary to sell their company — especially if something goes awry in the negotiations. The buyer may feel that they have to “walk on eggshells” to avoid angering the owner, for fear the buyer too will be churned out if a difference of opinion or argument occurs between them.
Warning Signal #3: The company is perpetually for sale. There is always “that company” that is perpetually for sale. Generally, it is a deal that has been reviewed by so many buyers and so many in the M&A community that the company has become cocktail party chatter. Prospective buyers and advisors wonder why the company has never been sold. Also, if there was an aborted transaction (or multiple aborted transactions!), the reasons for the failed sale(s) are likely to be the subject of cocktail party conversation and conjecture.
Warning Signal #4: The owner is deliberately vague and/or will not bring their advisors completely into their confidence. Another concern for potential buyers occurs when the owner is intentionally vague in disclosing basic information about the company and/or the owner’s advisors respond to questions with stumbling responses and/or blank stares. In these instances, it is abundantly clear to the buyer that the owner’s advisors do not know their client that well. In both cases, the buyer is wondering why it is so hard to secure very basic information to properly evaluate the acquisition opportunity. If it is difficult to secure basic information early in the process, how hard will it be to secure more comprehensive information during diligence? All of this leaves the buyer frustrated and wondering what the seller is hiding and if the transaction is worth the effort.
Warning Signal #5: The owner has curious or extreme add backs to the reported operating results. Overly theoretical add backs, add backs that are estimates or guesses, add backs that cannot be substantiated, or add backs that fail to pass the reasonableness test all create an impression that the earnings being offered for sale are overstated and will not withstand accounting diligence. Also, add backs that are a very high percentage of normalized EBITDA will draw increased scrutiny to the veracity of the normalized EBITDA. Bottom line, buyers will not submit an offer to acquire a company if they are nervous that the proposed normalized EBITDA cannot be substantiated during basic accounting diligence and for fear of the high likelihood of having to renegotiate the terms of the transaction later on.
How a buyer perceives a seller or their company is, in many cases, purely subjective. However, just as buyers have specific “tells” whether or not they are serious about purchasing a company, so too do owners have particular warning signals that may be off-putting to buyers. At the end of the day, none of these warning signals make a company unsalable. However, these warning signals most definitely will negatively impact sale price and transaction terms. If the owner has certain expectations that are not being realized through their efforts to sell their company, they have several options: i) not to sell, ii) identify a buyer that ignores the warning signals (good luck with that one!), or iii) reduce expectations so they are more consistent with the reality of the company. In Part 2, we will explore additional buyer warning signals.
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