Getting a fair price for your business, when it is time to sell, is largely based on its “transferable value”.  Here are ten quick tips to focus on in advance of a potential sale of your business to improve its marketability and therefore its transferable value.

1. Make yourself redundant.   Too many lower-middle market businesses thrive when run by their founder and falter when run by the next generation or new owners.  Astute buyers intrinsically understand that if a business acquisition is to be successful, there must be a way to reduce its reliance on its existing owner/ownership team.  Taking the time to build the management bench generates buyers that are much more open to acquisitions when the risk of transitioning is reduced.

2. Build/Develop a strategic growth plan. Many entrepreneurs didn’t become successful by spending inordinate amounts of time on generating fancy powerpoints from their strategic planning sessions. Typically, they know their market backward and frontwards and instinctively know where they are headed and how they will get there.  Unfortunately, that doesn’t translate well into transferable value.  Sellers benefit from having a well-articulated, documented, strategic growth plan even if it differs from their “thesis” on how to grow the business.

3. Clean up your financials.  For some companies that means getting their books audited, for others, it means cleaning up their balance sheet by writing off or selling obsolete inventory or redundant assets.  Working capital levels need to be adjusted to an appropriate amount as historical levels will likely be part of the negotiations.  Owner’s benefits and related party transactions are another area that should be cleaned up in advance of a sale.

4. Rationalize your spending. Deep scrutiny of operating expenses should be an ongoing process, but it is even more important when preparing the business for a sale.  Furthermore, while no one would suggest that you should radically reduce capital expenditures in advance of a planned sale, focusing primarily on maintenance or replacement Capex would be prudent. Any expansion-type Capex should have clear ROIs to help new owners understand how the benefits will accrue to them.

5. Focus on Quality of Earnings. High-quality revenue is generally considered to be sales that are sustainable and predictable, are profitable, and come from a diversity of products, customers, markets, etc.  High-quality revenue reduces the risk for any new owner or management team and therefore can increase business value. 

6. Stage your business for a sale.  Similar in concept to staging your house in advance of a sale, it is important to make sure that the office and business premises are neat, uncluttered, and clean. 

7. Reduce risk for buyers.  Business buyers and sellers view risk from an entirely different frame of reference.  Anything a seller can do before marketing the business to improve terms or secure improved supplier, customer, or employee contracts can reduce the perceived risk for a new owner. The degree of reliance on key suppliers is also something that a seller can focus on by finding alternatives or having backup plans in place.  Putting stay bonuses in place with key employees may also be necessary.

8. Review and upgrade IT Systems.  A thorough review of all things IT-related is usually a good idea when preparing for a sale.  How reliable and secure are your systems?  Is all your software properly licensed and up to date?  Many times how you collect, analyze, interpret, and utilize your customer, product, and market data is incredibly important to a buyer and needs upgrading.

9. Document your processes. Buyers typically want to make sure that all operating procedures and company policies are well documented and up to date. Sellers should consider imposing a vigourous “self-audit” similar in substance to what would be undertaken under any third-party audit.

10. Implement HR best practices. For top-performing teams, everyone must have a clear understanding of what is expected of them, their role, and how it fits within the organization’s goals. Putting HR best practices in place for recruiting, onboarding, evaluating, training, developing, promoting, and retaining employees can make a business much more marketable when it's time to sell.

Most rational people enter an M&A deal negotiation with the intent to close the deal but with an understanding that some compromises will be required along the way. There may be some healthy skepticism on the probability of a successful close by one or both parties but typically there is also some level of hope that it will work out and that a deal is doable.

However, like any important negotiation process, it is critical to know your “red lines” and when to say "no", even if it ends negotiations of what is otherwise a good M&A deal. The challenge is to ensure those items are dealt with early in the negotiations so that you and your team minimize the amount of time and resources you waste on a deal that can’t be completed.

Defining your red lines early doesn't mean being closed-minded to finding creative solutions to address your concerns. Both parties need to look beyond their counterparty’s “position” to explore their “interests” and focus on inventing options for mutual gain.  It can be hard work but worth it if an otherwise undoable deal becomes doable.

Unfortunately, it's not enough for only one side to focus on such principles.  Far too often, one party walks away from the deal at the "11th" hour based on issues that should have been addressed early or that they should have known much earlier in the process.

For the buyer, this can happen for any number of reasons. Sometimes, the buyer’s deal team may seem to be uncoordinated and unclear on the deal’s major objectives. Some members of the deal team are focused on immaterial due diligence details while some of the key decision-makers may not have entirely bought into the concept. This seems to be more common with larger corporate buyers.  Larger corporations sometimes require a diverse group of internal approvals across the organization, and it often seems that almost anyone can veto the deal if they’re not completely on board.  Of course, the more senior the “objector”, the more likely their input and opinion can kill the deal.  The deal team must keep the key decision-makers on board throughout the negotiation and due diligence phase to ensure that the entire process does not waste valuable resources, nor does it sour relations with the seller if the buyer walks late in the process.  The deal team needs to thoroughly explore the acquisition from a wide range of perspectives and have an early and deep understanding of the red lines from each of the key decision-makers’ frames of reference.

Sellers' red lines usually center around value but could be any number of factors, such as the amount of rolled equity or its share structure, non-competition clauses, transition or employment contracts, etc.  Sellers should insist on having discussions about the key deal terms and “must-haves” early in the process and each should be spelled out clearly in the LOI.  All too often a lot of key deal terms are excluded from the early negotiations because the buyer is unwilling to commit without further due diligence. Sellers should insist they be agreed to, at least in principle, so the buyer knows up front what is non-negotiable.

Some sellers are reluctant to expose certain aspects of the business early on in the negotiations and due diligence if they feel they could devalue the offer.  This is usually a mistake and is a good way to waste everyone’s time and money.
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Every M&A deal negotiation has its nuances, however, the probability of a successful close increases when both parties 1) ensure all key decision-makers are on board from the beginning, 2) address the most important “must-haves” and “red lines” upfront or early in the process, and 3) remain open-minded to finding creative solutions to address their counterparty’s interests.

Of course, any business buyer should first formulate their acquisition strategy before going out and seeking potential target candidates.  They also should formulate a clear post-transaction strategy for businesses they seek to acquire. 
 
For the seller, finding the right buyer via a “strategy-first” approach is a little dependent on the overall objectives of the seller.  If getting the top-selling price is the highest priority, business sellers should run a broad, professional, competitive process.  There are however situations when a strategy-first approach might be more appropriate.  By this, I mean when the seller is seeking a buyer/investor that 1) brings a specific strategic fit to the deal, whether that is access to markets, resources, etc., and 2), the strategic fit is more important to the seller than getting top dollar.

Deciding on the right priorities before engaging in a discussion with potential buyers or hiring an investment bank to run a process is a critical first step.  Once a seller has decided what his/her highest priorities are, then the decision on what approach to take is a little easier. Here is a link to the types of questions you should answer before you start.

When the strategic fit is the sellers’ highest priority and when there are only half a dozen or more buyer candidates, a limited sell-side process may be appropriate.  When the strategic fit is critical and there are very few suitable candidates, the seller is in a delicate position.  Approaching a buyer directly to explore whether they are interested in acquiring your business can be a little intimidating, particularly if there is no pre-existing relationship.  If the buyer candidate is a direct competitor or a potential future competitor, it can put the seller in a precarious position.

However, establishing a working relationship with a potential buyer can be a non-threatening way to explore the strategic fit between the buyer and the seller, without the seller even exposing that they may have an interest in an eventual sale.  Without explicitly outlining that a sale might be considered, potential sellers should look for ways to build a commercial relationship as a first step.  Of course, once a trusting relationship has been established, it can be easier to explore synergies, business strategy, cultural fit, etc.

Whether you’re a future business buyer or a business seller, one of the most important exercises you should undertake before going to market is to identify your highest transaction priorities.  Often, business sellers fail to think through what they want to achieve from a sale, other than obtaining the highest price.  Likewise, business buyers often know they want to grow through acquisitions but fail to clearly define their priorities and resource their acquisition strategy accordingly.

If obtaining the maximum value is a seller’s highest priority, it is usually advisable to hire an Investment Bank/M&A Advisor to run a broad process to create competitive tension between potential buyers. However, not all businesses and situations are well-suited to the traditional sell-side controlled auction process.

Interestingly, the most obvious buyer(s) sometimes submit a mediocre offer or decide to “pass”, and unexpected buyers sometimes submit impressive initial offers. While an unexpected buyer can cause some consternation, as they may not know what they don’t know, a broad, competitive process, helps ensure that the highest selling price is obtained.

The highest selling price, however, often comes in the form of a structured deal.  So, if the priority is to obtain the highest total enterprise value, business sellers should be prepared to accept earnouts or other contingent payouts and/or provide financing support such as equity rolls or vendor takebacks (VTB), etc.  It is important to calculate how much “cash at close” will be needed after tax and all other expenses are considered.  An equity roll or VTB demonstrates the sellers’ confidence in the future of the business and therefore it can drive valuations, or at the very least, help ensure that the best buyers submit offers.

Furthermore, many buyers will require a transitional role for owner/managers.  If “handing over the keys” and walking from the business is your highest priority, the type of sale process you engage in and the buyer universe you approach should be designed to achieve this priority.  On the other hand, perhaps you are looking for a specific ongoing role under new ownership.  Either way, defining your priorities on your potential post-transaction role, if any, is critical.
Maintaining or ceding control is also often one of the most important priorities to decide at the onset of any buy or sell process.

In some situations, selling the shares of the business (rather than the assets) may generate higher after-tax net proceeds but buyers may offer less because they may lose some potential tax benefits and assume more liability.  Sellers need to decide how important is it is to sell equity (shares) vs the assets of the business.  Also, sellers should decide how important it is for them to retain (and lease-back) or divest any real estate (if owned by the business or an affiliate) that the business utilizes.

Other important priorities to consider include the importance of the retention of the management team by any new owner, the cultural fit, the impact of a transaction on employees, customers, suppliers, and other stakeholders.  Business sellers need to think through the impact a sale to a direct competitor may have on the business and decide whether it is important the business remain as a stand-alone entity.  Is it important that the legacy of the business’s operations, brands, etc. be maintained?  In other cases, the priority may be to capture needed synergies or to facilitate needed industry consolidation to survive and thrive in the future.

For business buyers, many of the same questions need to be answered.

Rarely do acquisition or divestiture processes proceed exactly as planned.  The approach you take, however, needs to be shaped by your highest priorities.
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Take our business seller survey to help you sort through your most important transaction priorities.

Many people would argue that the “market” is the best judge of a business’s value.  While true, it is not very helpful if business sellers or buyers go to market with unrealistic expectations.  Business sellers should never attempt to market their business to determine its value unless they intend to carry through with a sale.  Astute, serious buyers will quickly ascertain whether a seller is serious or simply testing the market.  It may impact the seller’s ability to effectively market the business in the future.

For sellers, having the business professionally appraised or alternatively, assessed/evaluated by an outside professional with deep industry-specific M&A experience, is an important first step. It is always possible that sellers will find a buyer that will pay an outsized multiple, or that buyers will find a below-market bargain, but it should never be assumed. 

There are many ways to estimate the enterprise value of a business based on its historical financials, asset values (costs to replace or build), projected cash flow/earnings, comparable analyses, precedent transactions, or some combination of each. All approaches have their advantages and disadvantages with the true market value influenced by the prevailing conditions both in the general economy and the specific industry vertical the business operates in.  There is no universally accepted best way to estimate the value of a private company in advance of a sale.

There are, however, a lot of resources that private company owners should think about utilizing before considering a sale.  Whatever valuation approach is used, it should be a prerequisite for any sale process or speculative dialogue with buyers.  Taking the time to have an outside professional assess the value of the business will provide owners with some important insights on what will drive its value in the future.  It is never as simple as growing the topline and bottom line, although growth is an important valuation driver.  Besides an estimate of the value of the business, owners should speak to professionals they trust with experience in their industry to ascertain the marketability of the business. Are there a small handful of buyers or would the business appeal to a wide range of financial and strategic buyers?  The broader the interest, the more likely a favourable outcome if selling for the highest price is the primary motivator.  Having an appreciation of enterprise value is even more critical when the buyer universe is limited.

A business appraisal by an accredited professional is often the best approach when there is a high percentage of the business value tied up in real estate and hard assets, in which the condition of those assets and their replacement value is crucial.  Commercial/Industrial real estate values are largely driven by local economic forces, so hiring an accredited appraiser with local knowledge and experience is advisable.
 
M&A advisors and Investment Banks are likely better at assessing the current market trends and valuation multiples in specific industry verticals they participate in and are more likely to have insider information on actual trading multiples based on their prior experience. While analytics, models, databases, and projections are important and helpful, experience, insight, and knowledge of the industry dynamics, the buyers’ strategies, and the underlying market trends will provide sellers with needed perspective in advance of a potential sale.
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Whatever approach sellers take, having a realistic view on the value of the business is a crucial first step, regardless if you want to broadly market the business through a traditional M&A sell-side process, or deal directly with potential buyers that would be a strategic fit.

Private business owners are increasingly seeking the benefits of Advisory Boards to provide independent and experienced counsel on complex issues such as exit planning, succession strategies, growth strategies, acquisitions/divestitures, etc. These advisors are often experienced industry veterans, CPAs, lawyers, consultants, or other trusted advisors and act as a “non-binding” sounding board for private company leadership.

For some entrepreneurs, success has come from working hard and by figuring out a lot of things on their own, so seeking counsel from outsiders can seem a little daunting.  However, as a business grows in complexity, the value an Advisory Board can bring to private company owner(s) increases exponentially, especially when it is carefully composed and structured to meet the specific needs of the business.

It is important to understand the difference between an Advisory Board and the Board of Directors (BOD).  Advisory boards can provide independent advisory services to the owner, the BOD, the CEO, or the senior management team, but do not have a fiduciary duty to the company and are not tasked with oversight of management on behalf of the shareholders.  They simply are there to provide independent counsel.

The first step in forming an Advisory Board is to define what guidance will be needed from the board.  This begins with a clear vision, mission, and core values statement that can be articulated to Advisory Board candidates to ensure alignment.  Understanding where you are headed will allow you to assess the experience and talent of potential advisory board candidates against how they may or may not be able to help you with your mission.
 
Focus on finding members that with help you with your “holes and goals”.

One way to consider candidates is to ask the simple question – “Are they ahead of me on this?  If for example, you see a path to growing your business to “X” million in sales, focus on potential candidates that have “been there and done that”.

Building on the concept of the board’s makeup and mandate, it is important to select candidates that will provide diverse opinions and therefore provide a healthy dialogue amongst board members. Look for candidates that will challenge the status quo with you, your partners, or with management and are not afraid of taking an alternative viewpoint.  The value of the board to company owners is in the diversity of opinions and the varied, independent counsel, that is not stuck in a narrow way of thinking.

While technical advisory boards are quite common for start-ups and high-growth specialized businesses (eg: pharma, biotech), mature company Advisory Boards need members with leadership and business experience in combination with members with specialized subject matter knowledge (depending on the mandate).

There are plenty of other considerations that need to be decided before forming an Advisory Board, such as how big the board should be, how it should meet (i.e. in person, virtual, one-to-one), how often it should meet, what time commitment will be needed for each member, and how will you compensate members?  Also, how will you help ensure your board members are successful?  It is more likely you will get high-quality advice when you provide the opportunity for the board members to properly prepare for meetings with a professional board package and a clear meeting agenda.   How will you communicate with board members between meetings, and who will take the role as board chair?

Finally, in the spirit of continuous improvement, you should always be prepared to change the makeup of your Advisory Board as the business needs change.
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Like most things in life, the more you put into something, the more you get out of it.  This applies to the formation of an Advisory Board, recruiting and selecting its members, and providing it the tools and resources to ensure it meets its objectives and ultimately drives value for the company owners.

​Business sellers often think their business is worth more than what a buyer is willing to pay for it; at least, what they will pay as an upfront payment of “all cash.”  That’s not to say that either party is right or wrong, it’s just both parties view the risk/reward balance from a different frame of reference. Deal negotiations almost always involve some degree of compromise. This blog article outlines some ideas that can be used to help bridge differences of opinion between buyers and sellers on business value.
 
Earnout
The use of an earnout is one common mechanism buyers and sellers of private businesses can use to simultaneously satisfy both parties differing viewpoints on business value and its growth potential. Since buyers often remain skeptical of the sellers’ projections, particularly when there are a lot of market uncertainties, the earnout can help mitigate those concerns, as payment is made when expected results materialize. Earnouts are usually based on meeting certain future financial metrics, such as sales, or EBITDA.
 
Milestone payment
Similar to the earnout, a milestone payment is when a buyer agrees to make additional cash payments to the business seller(s) after the transaction closes, contingent on the occurrence of a certain agreed-upon event(s). Normally, it applies to situations where the seller has laid the groundwork for a significant event that will positively impact the business and thereby negotiates a cash payment should that event occur under new ownership within a given time frame. For example, if the business obtains a new “game-changing” customer, a patent is granted, a new product is granted regulatory approval, etc.
 
Holdback in escrow
When the buyer and seller disagree about the potential financial impact or risk associated with a potential future event, the parties can agree to place a portion of the purchase price in escrow, subject to payout to the seller if the event remedies itself, or repaid to the buyer if it doesn’t, within an agreed-upon time. Examples could include the outcome of a lawsuit or a product regulatory review. Holdbacks are standard practice in the M&A negotiation process as protection for the buyer against misrepresentations by the seller, but can also be used as a tool to bridge differences in perspective of the likelihood of certain negative events occurring in the future.
 
Seller financing or vendor take-back (VTB)
Sometimes the simplest solution for a value gap can be solved when the seller agrees to help finance the deal with a vendor take-back note secured by the company’s assets and/or personally by the buyer. It helps the buyer acquire the business based on the future cash flow it generates. This is very common with “main street” deals and in the lower-middle market, as access to competitive financing is often less robust for smaller buyers. It also demonstrates confidence in the business and its outlook by the seller. While there are many ways in which deals with owner-financing can be structured, in general, most sellers will want to stay involved in the business to some degree to keep an eye on their ongoing investment and the ability of the buyer to eventually pay out the VTB.
 
Equity rolls
Like the VTB, when a seller agrees to re-invest proceeds as equity back into the business, it demonstrates confidence in its future potential and therefore can be a means of obtaining a higher valuation. Unlike the typical VTB, it allows the seller to share in the upside potential of the business, however, the seller will also share in the relative risk associated with the business.
 
Equity rolls are common in PE-sponsored deals, but less common when the buyer is another industry participant (strategics). Full liquidity of the investment normally comes naturally when the PE-sponsored acquirer sells the business (usually 3-7 years after its initial investment) but it can be a little trickier in strategic buyer equity rolls. When a future sale of the entire business is not anticipated in the foreseeable future “Put Options” can be a solution. This is when the seller negotiates an option to sell some or all of its rolled equity to its equity partner at fair market value during an agreed-upon period in the future.
 
Discounts to an ongoing commercial relationship
In some cases, buyers and/or sellers may be able to negotiate a preferential business relationship to help bridge differences in value. For example, the seller could provide products or services to the buyer at preferred rates for an agreed-upon period, in turn for paying a more attractive price for the business.
 
Retention of real estate
Many buyers are more interested in the operating business than any real estate that is owned by the business. Sellers can sometimes retain the real estate and lease it back to the new owner, thereby reducing the purchase price for the buyer and gaining a stream of future income. This approach can also potentially defer some taxes for the seller.
 
Anti-embarrassment protection
Some sellers are afraid that a buyer will acquire their business and simply “flip” it in a year or two at a much higher value. On occasion, it may be possible to use an “anti-embarrassment” provision whereby if a flip were to occur within an agreed-upon time, the buyer is required to share a portion of the proceeds with the original seller. This is used mostly when the seller is forced to sell for some reason.
 
Product line or business unit carveouts
Buyers often have specific reasons why they want to acquire a business, whether it is gaining market share, scaling operations, capturing synergies, or simply putting capital to work. However, there is usually no perfect business that meets all its objectives. Sellers need to be keenly aware of the attributes of their business in which the potential buyer sees the most value, and conversely the aspects of their business in which the buyer sees little value. Sometimes, it may be possible to carve out those components of the business in which the buyer places little value, to retain or sell to another buyer in the future. For example, there may be patents, products in development, products/product-lines, business units, facilities, etc. in which a carveout could bridge a valuation gap.
 
Transition plan
A large part of the value of any transaction lies in the retention of key people, often including the owner and/or management team. Sellers that are open to working with the new owner through a transition period can help reduce the risk for the buyer and thereby bridge valuation gaps.

Choosing the right M&A advisory firm to assist you in the sale of your business is no easy task.  Besides hiring someone you trust that will always have your best interests in mind, it starts with an understanding of how your business needs fit with the core services provided by the candidate M&A firm, as there are several types of firms that typically fill different needs in the marketplace.  This blog article outlines some of the main types of M&A Advisory firms and the circumstances in which their services are most appropriate.

Business Brokers
Business Brokerage firms may be best described as Real Estate brokers for small businesses. They normally are used most appropriately for “Main Street” businesses like dealerships (Eg: boats, RVs, cars, equipment), restaurants, farms, services (Eg: janitorial, accounting, HVAC), etc.  Often there may be a real estate component of the business (although not necessarily) and the enterprise value is usually less than $10 million.  The best buyer is often someone else that is already in the same business or another entrepreneur that is looking to own and operate their own business.  Normally the Business Broker advertises the sale of the business with its “recast” earnings, Seller’s Discretionary Earnings (SDE), and whether it includes real estate, inventory, etc. on a web listing service and to its network of approved buyers. Unlike other M&A advisory firms, some business brokers may advise both the seller and buyer simultaneously if it is properly disclosed to both parties.

Niche M&A Advisory Firm
Some smaller firms (such as B&A Corporate Advisors), focus on specific industry segments based on specialized knowledge, experience, and extensive contacts.  The services offered are sometimes combined with consulting services.  Sell-side services are usually limited in scope to high value-add, narrow processes with perhaps up to ~25 to perhaps 50 potential strategic buyers.  The number of engagements at any given time is limited so that a customized, focused, flexible process is delivered to select clients.

Typically, Niche M&A Advisory Firms sell-side services are focused on closely held, family-owned, and/or entrepreneurial-led private companies with a deal size of ~$5 -$30 million in enterprise value, and where the potential buyer will operate and have a controlling interest in the seller’s business.

Lower-Middle-Market/Boutique Investment Bank
Lower-middle-market Investment Banks (eg: SDR Ventures), sometimes referred to as Boutique Investment Banks, are usually made up of between 10 and 30 employees operating out of a single office.  Each client engagement is resourced like the larger investment banks, however, the services are limited to buy-side/sell-side M&A advisory and capital raising activities.  Deals are led by a senior member of the team, with analysts, marketing, and administrative staff supporting each engagement.  They normally subscribe to many specialized databases and often have alliances with other International M&A firms.

In the US, they typically need to be registered with FINRA and/or SPIC (or as exempt dealers in Canada) for their capital raising and other regulated securities activities.  Most are generalist firms and excel in broad sell-side services (auctions with 100-300 potential buyers including wealthy individuals, family offices, and private equity firms) and by providing corporate finance services to private, closely-held, family or entrepreneur-led businesses with enterprise values between $20 and $100 million.

Lower-middle market investment banks are most suited for highly marketable companies that will generate strong and broad interest from both strategics and private investors.

Middle-Market Investment Bank
Middle-market Investment Banks provide all the services the lower-middle-market banks provide along with IPOs, security underwritings, asset management services, equity research, and sell a host of investment products/services to and for their public and private clients.  They are highly regulated in both Canada and the US.  Typically, they may have hundreds of staff operating out of multiple offices in several countries.  M&A deal size is typically ~$50 to $500 million or more.

Senior team members often focus on “rainmaking” activities for their large corporate clients.  They often only directly manage sell-side engagements on the larger deals, or those that involve their larger, multiproduct clients.  Smaller deals are assigned and led by more junior staff.

Bulge Bracket Investment Bank
Bulge Bracket Ibanks are the big brand name banks with often thousands of employees across hundreds of offices around the world.  Their M&A and corporate finance advisory services are focused on large and mega deals (~$1 billion +), often providing third-party fairness opinions for large, publicly-traded multinationals.  They provide everything the middle-market Ibanks provide, plus retail investment products, mutual funds, ETFs, manage hedge/private equity funds, and sometimes are an arm of a regular commercial bank.

Knowing your needs and how the M&A Advisory community would view your business is an important first step in selecting the best firm.  Additional selection criteria will be outlined in a future B&A Blog article.

There are few things more frustrating for a business seller than having the price or terms of an attractive offer negatively revised at the eleventh hour or as the buyer completes their due diligence.  In the industry, we call it a “re-trade” and it can be a devastating blow to a seller’s morale: particularly when it happens after there has been a lot of time and effort put forth by both parties.  This blog article will discuss ways to mitigate the potential risk of a re-trade late in the sale process and outlines some buyer tactics that should be seen as a warning sign that a re-trade may be imminent.

Preparing for the sale
The most important thing an owner can do to reduce the chance a potential buyer will attempt to re-trade a good offer late in the process lies in being properly prepared. Despite each buyer viewing the business from their frame of reference, it is best to try to anticipate any potential issues before getting into negotiations.  This can be achieved by undertaking a thorough “seller’s due diligence” beforehand.

It is rare for a negotiating process to go smoothly from initial dialogue to closing and there are often lots of twists and turns as the buyer learns more about the business.  Nevertheless, having a comprehensive view of the business from a buyer’s perspective helps the seller properly anticipate the areas in which a buyer may have legitimate concerns.  These should be addressed with the potential buyer very early on in the discussions.  Holding on to critical information that a buyer legitimately needs or simply feeding them only the information as it is requested risks triggering a re-trade.

Of course, there are situations in which real risks are uncovered during the due diligence period, such as an environmental issue, or an improper accounting issue, that may warrant a re-trade when it would materially impact the business’ value.

Have clear insight on what is non-negotiable
Having clear insight into what is important to you upfront and articulating it to potential buyers early on also helps reduce the chance of a late-stage re-trade. If an all-cash deal is critical, make sure any potential buyer knows that.  If your role post-transaction or retaining key employees is important, make sure they understand your position.  This helps ensure they consider your non-negotiable terms in the context of any offer they provide.

Always have an alternate option
One of the advantages of working with an M&A Advisor and running a competitive process is that often there are secondary buyers that have submitted bids, or even LOIs that were good but maybe not the best.  Your advisor’s role is to keep these buyer candidates interested in the opportunity while under LOI exclusivity while ensuring that the lead candidate knows that other buyers are waiting in the wings.  This reduces their inclination to try to re-trade the deal, unless it is for a valid reason.

Being prepared to walk away from any negotiation is also a good option in many situations.

Ensure they have completed sufficient due diligence before you accept a “Letter of Intent (LOI)” and go exclusive
Often a buyer will provide a non-binding offering letter, outlining the major terms and price, or price range, that they anticipate paying and ask for an exclusive period to conduct their due diligence.  This is only a legitimate approach if they have done enough preliminary due diligence to have a very clear understanding of the business, its markets, customers, competition, employees, assets, etc.  There should be very few questions left for the buyer about the business and its operations after an LOI is agreed to.  Accepting a non-binding offer that does not include details on how much working capital is included, what assets are included/excluded, whether it is an offer for the company stock or its assets, what will happen to employees and management, etc., is an offer that is highly prone to be re-traded.  In other words, the LOI should outline all the major terms of all the definitive agreements, including the purchase and sale agreement, leases, working capital adjustments, employment agreements, non-competes, etc.

Once an LOI is agreed to, there should only be confirmatory due diligence left to complete. Confirmatory due diligence usually involves considerable investments by the buyer in hiring outside advisors to provide environmental assessments and/or legal/tax/financial due diligence, so it is legitimate for a buyer to ask for some time whereby they can get its required due diligence completed unfettered.

Keeping your eye on the business while negotiating
One of the most common reasons a buyer initiates a discussion to re-trade is because business performance falls short of expectations.  Owners that aggressively promote a business’s growth and then start having month-ends that fall short during the negotiation process are highly susceptible to a re-trade discussion.  No matter how much of a distraction the sale process can be, owners/managers need to stay highly focused on the business and its operations during the process.

Understand the buyer’s tactics
Unfortunately, some buyers intentionally use the re-trade as a tactic to close their deals on terms they deem favourable.  While unscrupulous, it works in some cases.  Sometimes a buyer will provide the seller a vague but highly attractive offer, get the deal locked in under an exclusivity period, and then as the seller fatigues and frustration sets in, they start with the “yeah buts”.  Yeah, but we didn’t think your margins on the XYZ product line would be that low.  Yeah, but we didn’t know that you had 20% of your sales coming from one customer.  The buyer hopes that the seller will be so far down the sale path that they will be more open to compromise.
In other cases, when a seller is using an M&A Advisor and running a competitive process, some buyers use an aggressive bid at the early stages of the process to gain an advantage by knocking out other legitimate buyers who have made more realistic bids. An experienced advisor will help you avoid this tactic.

Some warning signs that a re-trade tactic might be forthcoming, is if 1) the offer is good to be true, 2) the potential buyer has done very little due diligence before providing an offer, 3) they have a poor understanding of the business, or 4) in the case of direct seller to buyer negotiations, when the LOI is vague and short on specifics.

When and how you sell your business can sometimes be as important as what you are selling.  Setting the stage for success requires a well-thought-out strategy or you risk experiencing an extended period of distractions and frustration.  One approach is to start accepting incoming inquiries from potential buyers (or in some circumstances reaching out to a couple of the most obvious buyers) to gauge their level of interest, however, this strategy can create a lot of future challenges if not handled with care.

Before you reach out to potential buyers to test the waters or accept those inbound inquiries beyond a simple acknowledgment, it is important to define your objectives. 
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If you are trying to simply gauge the degree of interest in your business by opening a dialogue and sharing some details about your operations, be sure to communicate your objectives to the potential buyer.  Some buyers will get frustrated very quickly if they feel like you are not a serious seller and are just testing the market.  Others may not be interested in spending any time having a dialogue unless they know you are ready to get into serious negotiations.  However, if you articulate that you may be open to a deal under the right circumstances in the future, most will be honest with you about how interested they may be, based on sharing some preliminary information under an NDA.
 
Taking this approach can also be a way to explore the mutual strategic fit and build a strong relationship.

Of course, it also might generate one or more preliminary offers.  The caution here is that there can be a long and bumpy path between an initial offer and a closed deal.  It is not uncommon for buyers to start high with vaguely defined terms and whittle the offer down as detailed discussions progress.  This is particularly true when they perceive that there are no other active discussions underway with other potential buyer candidates.

Another caution is that some buyers will express a high degree of interest until it gets down to the “brass tacks” on value.

It is best to leave discussions on value alone unless you are very interested in selling and very serious about closing a deal with a specific buyer.  These discussions should be reserved for only the very best buyers under the most ideal conditions (fit, relationship, etc.).
If your primary objective is to test the waters to get a sense of the value of your business, you need to exercise extreme caution.  Soliciting offers without a clear intent to sell, or when value expectations are unrealistic, can create ill will with potential buyers and may limit your buyer prospects in the future.  If your goal is to gain an understanding of value, the last approach you should take is to “tease” the business with buyers.  A much better approach is to work with an experienced M&A advisor that knows your industry, the market, and the buyers to give you an estimate of a value range.

Private business owners routinely underestimate the time and effort it takes to close a sale and are often unprepared for the inevitable roller coaster ride, particularly if they have never sold a business before.  Even when your market test seems to generate a lot of strong interest, you are best to take a step back, get ready by preparing the business for the due diligence process, and work with an M&A Advisor to effectively position the business to create competition between buyers.

Going out into the market and sequentially talking to potential buyers one by one is probably the worst strategy to deploy.  In rare cases, it may make sense, but in many circumstances, it can “contaminate” the deal and make it very difficult to close any transaction if it proceeds beyond one or at the most two potential buyers.
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The lesson here is to have clearly defined objectives before opening up any one-to-one dialogue with any potential buyer.  Exploring their degree of interest and the mutual fit without discussing value can be an effective setup for a successful close.  Testing the market for value is usually a bad idea and sequentially trying to find the right buyer, can be a recipe for disaster except under the rarest of situations.