This month one of my Senior Advisors, Anita Lieser, describes a recent transaction that went remarkably well. It is a good time to reflect on the transaction and to educate each other, and our buyers and sellers on the characteristics of a deal that got completed without the typical headaches. Too many times we focus on the problems because that’s where most of the stress comes from. There are many deals that go well every year. Here’s her story…
Anatomy of a Successful Transaction…What Went Right?
As a business broker by trade, it is a constant challenge to anticipate and overcome obstacles that may threaten the completion of a transaction. Just when my fellow brokers and I think we have seen every reason for a deal to fall apart, yet another will rear its ugly head. However, I was recently involved with a transaction that seemed to defy Murphy’s Law. When both buyer and seller walked away from the closing table thrilled, I began contemplating what could be learned from this successful transaction that could minimize future obstacles. Instead of asking “What went wrong?” I was faced with an opportunity to analyze “What went right?”
Consider these facts: After casually trying to sell this simple service business himself, the owner signed an Apex Engagement Agreement on June 11, 2010. After the owner and I spent about a week and a half finalizing the marketing materials, the business was ready to go to market and the brokers in my office began fielding inquiries from buyers. On July 1, the seller and I met with two different buyers. On July 2, the seller accepted a full price offer from one of these buyers. Bank and franchisor approval were both received by the first week of August, and on Friday, Sept. 3, 2010, the transaction successfully made it to the closing table.
So, what were the key elements that contributed to the success of this transaction?
1. The seller’s business model and meticulous bookkeeping made the business attractive to numerous buyers and to the lender. The seller had spent many years building a business with an attractive cash flow. He had hired and trained technicians to complete the direct labor, putting himself in more of a managerial role. He had implemented good record keeping procedures so that financial records were clean, organized, easy to understand, and tied to tax returns. These factors were also important to the lender, and, when coupled with the strength of the buyer, led the first bank approached to offer very favorable terms without any requirement for the seller to carry a portion of the note.
2. The seller set a reasonable asking price. Sellers often set their asking price too high because they want to ensure they don’t leave money on the table. In doing so, they often lose the interest of the majority of buyers, and they don’t realize that it is nearly impossible to get buyers to reconsider even if the price is later lowered. Instead, this business owner, after consultation with the broker, understood the concept of setting the price so that competition among buyers would mitigate the need for negotiations. This reasonable asking price created a good deal of traffic, creating a seller’s market for the business which quickly culminated in a full price offer with seller-favorable terms.
3. The seller responded promptly and succinctly to all buyer questions and due diligence requests. This is not as simple as it sounds. In meetings with buyers, sellers frequently struggle to provide just the right level of information. While sellers are typically trying to be helpful, buyers can be easily overwhelmed with too much information. Instead, this seller let the buyer set the pace and content of the conversation. The seller listened closely to buyer questions, answered them directly, completely, and succinctly, then allowed the buyer to move on to the next question. Once the business was under contract, the seller provided all information requested by the buyer and his lender within a few hours regardless of the burden it placed on the seller. This display of attentiveness allowed the lender and buyer to become more comfortable with both the financial history of the business and the seller’s contractual commitment to aid in the transition of the business.
4. Expectations were understood by all parties. Two months is an extremely aggressive timeframe in which to complete a business purchase that involves both bank financing and a franchisor, as tasks have to be completed in a very methodical and specific chronological order. From the start, both buyer and seller agreed to a timeline of activities and due dates required to meet this timeframe. This allowed all parties to understand the impact of a missed due date. During the process, when a couple of due dates were not met, the timeline was reviewed and modified to ascertain whether the target close date was still intact.
5. The buyer persevered. Because the buyer was trying to go through the due diligence process at the same time that both the lender and franchisor placed requirements on him, the process was sometimes overwhelming for him. Brokers, lenders, and the franchisor worked together to help the buyer prioritize tasks and stay focused. Though he carried the heaviest load in the process, the buyer requested assistance when needed and was able to stay on track.
6. The seller showed flexibility. Though the company vehicles that were driven on a daily basis had been maintained to the satisfaction of the seller and his mechanic, it was determined during due diligence that they were not maintained to the standards of the buyer’s mechanic. It was also discovered that an ongoing business expense would be increasing at the beginning of the next year. The seller agreed to credit the buyer with a small portion of the purchase price (about 1%) at closing to offset these items. I wish sellers would more often realize that the dollars spent in a situation such as this are not nearly as critical as the priceless message of cooperation and interest in his success that such actions communicate to the buyer.
Oh, remember that I said that the seller had been casually trying to sell this business on his own prior to engaging us? How exciting that less than three months later, he walked away from the closing table with a check (net of broker commission and the buyer credit for vehicle maintenance) that was 13% higher than the price he had advertised on Craigslist. And the buyer is now the proud owner of a business that, after debt service, will provide him with a very good living. What a great example of what can go right!
Recent Transactions Completed
Daycare – Kansas City, MO
Carpet Cleaning Franchise – Kansas City, MO
We look forward to assisting in your business sale or acquisition plans. Call and talk to an Apex Business Advisor today!
Doug Hubler
President
There must be give and take to make a deal happen. That might sound like common sense, but when the money is on the table and egos get in the way, deals fall apart. It is important to understand the different perspectives from either side of the negotiating table:
