Buyer Strategy/Seller Strategy
Just as with so many other things in life, it takes two to buy a business. A buyer and a seller are the key ingredients. Brokers, accountants, lawyers and other experts make sure everything is in the right measure and you don’t get burned. But without a willing buyer and a motivated seller there is no deal. And they may have more in common than they think.
Both the buyer and the seller want the company sold. Both want as painless a process as possible. Both want it over quickly. Neither wants to get very far into the deal and have it fall apart. Neither wants the word to get out that the deal is in process. And neither wants the business to fail.
With so much in common, how could anything go wrong? Simple, buyers and sellers speak different languages. Each is reading for different clues, deciphering vastly different nuances, viewing the whole process through a different set of lenses. And this is exactly as it should be. Friendly skepticism is the ideal in all adversarial transactions. Former American President, Ronald Reagan, used to chide the then-Soviet Premier, Mikhail Gorbachev, with the phrase “Trust, but Verify.” The United States was willing to accept what the Russians said was true only after the United States had verified it to be true. As with nuclear warheads, the same is true for deal points. While negotiations may be pleasant exchanges and the buyer and seller may become best buddies after all is said and done, neither should lose that sense of skepticism and the need to verify key points.
It goes without saying that the wants and needs of buyers and sellers are often at odds with one another. Knowing these wants and needs, being able to put yourself in the other party’s shoes, will help in reaching a deal that is acceptable to both sides. Or it may just as easily assist in a deal not coming together. It should be noted that not every deal is finalized, nor should they be concluded. Some deals you will walk away from, a few you will run from. By following the key elements we discuss in this book, by using your intuition and judgment, you will know which deals to complete and which to discard as unrealistic, overpriced or downright scary.
As a general overview, the buyer is watching the road ahead. All discussions are filtered through a view of future goals. In contrast, the seller is watching the rearview mirror. All discussions are filtered through historical contexts. While both may be in the same room, they often hear different conversations due to their respective filters. Knowing this and trying to see through the other’s filter can make the whole process a little more clear.
Know your audience. Both buyer and seller are auditioning. Both are posturing. The buyer wants to convince the seller that he or she has the financial and moral wherewithal to live up to contractual obligations. The seller wants to convince the buyer that his or her company is the best bargain going. It’s important to remember who the audience is in order to give it what it wants. For example, if the seller is concerned about the future of employee positions and the buyer is only focusing on streamlining management, neither will be satisfied.
Case No. 2 – Paris and Richard
Paris was an up-and-coming real estate broker in an affluent area. He had attracted a following by providing excellent and expert service, as well as by being involved in every civic group in town. He was unapologetically aggressive in all of his dealings. He was working for a large national brokerage firm, but was ready to branch out on his own. Rather than build up a real-estate company from scratch, he wanted to save, in his estimation, ten years in establishing name recognition by acquiring an existing business.
Richard owned Piedmont Realty, which had three decent producing offices, thirty brokers and had been in business for over forty-five years. Richard was considering retirement but was concerned about what would happen to the other brokers in the office, whom he considered to be family. When Paris approached him about selling, he was hesitant. He was unsure if Paris was the right person to continue the family tradition of Piedmont Realty.
But Richard was encouraged by his attorney to consider Paris’ expression of interest. The attorney explained that if Richard retired without selling the business his family of brokers would be disbanded anyway. It was at least worth listening to what Paris had to offer.
A contract was drawn up by Richard’s attorney requiring Paris to keep the entire transaction confidential. He was not allowed to speak to any of Richard’s brokers, vendors or customers about the potential purchase. Paris was allowed to review Richard’s financial books and records and speak to Richard’s CPA about the business. He was allowed after-hours access to the office, accompanied by Richard, and that was all. He was given two weeks to engage in a due diligence (investigative) review of Piedmont Realty. Richard didn’t want to waste a lot of time and money on a transaction he didn’t see working out anyway.
Eleven days later, after reviewing the relevant documents and sizing up office procedures, Paris met with Richard. The fatal posturing began. Paris started by pointing out that Piedmont Realty was not search engine optimized. No one could find Piedmont Realty on the internet, which was now a key to real estate success. Paris told Richard to bring Piedmont Realty to current information technology standards would cost $50,000. Paris then said that any purchase price they agreed upon would have to be reduced by $50,000 since that is what Paris would have to invest to get Piedmont Realty found on the internet.
Richard was offended by this opening gambit. He didn’t like the way Paris was handling things, so he cut to the chase. Three key brokers had been with Piedmont Realty for a long time. Cowboy, Jimmie and Evalynn had helped him through thick and thin, and Richard wanted a guarantee that the three could remain for as long as they wanted.
Paris had crunched the numbers. On a per-desk basis, accounting for all overhead and administrative items, each broker had to bring in $3,500 per month for Piedmont Realty to break even. Only Cowboy was meeting that monthly nut. The company was losing thousands per year by having Jimmie and Evalynn, now less productive brokers, taking up desk space. Paris said they would be given six months to increase their productivity to above break-even. If they couldn’t do it, their desk would be given to a more aggressive broker.
That was all Richard needed to hear. Right then and there he decided he would never sell his company to Paris. He would rather lose some money and allow the company to slowly wither away, if that was to be its fate, than to ever make (or allow someone else to make) production demands on the key employees who got him there in the first place.
For Paris’ part, he moved onto the next seller. While he understood Richard’s loyalty to his employees, he was a dispassionate buyer. He could never own a business where there were constraints on who he could terminate. If Richard couldn’t get past his ego and emotion to conclude a sale, so be it. Paris was unemotional and would look elsewhere.
As the case illustrates, frequently the objectives of the buyer and seller are going to be very different. Better to spend a short period of time – a two-week due diligence review – and see if the differences are too large to overcome, than spend months and months of time before getting to the central issues motivating the buyer and seller. This strategy allowed Paris to get to the heart of the matter and move on. It also saved both Paris and Richard from the high legal fees that can add up in the sale of a business. Understanding and overcoming each party’s objectives early on can help lead to a successful sale. The longer key objectives are left unaddressed, the more likely they will be left to explode at the end, thus potentially derailing any sale and wasting a lot of time and money in the process.
The Seller
As a seller, you are looking for a buyer.
