RISK ALERT!! “THE ONE-OFF BUYER”
A successful business owner will oftentimes get phone calls from parties who are interested in acquiring their business. If the business is large enough (over $5M EBITDA) these calls will be fairly frequent and include a large number of calls from investment bankers who represent that “they have the buyer for you.” Owners then call me and want to meet to discuss a possible sale. That buyer may be a competitor, customer or supplier the seller has known for many years and/or has been in discussions to buy the business for a long period of time.
The stage is set for the “one-off buyer” scenario. Seller has not taken the business to market and has not engaged any other serious possible buyers. Now the tight-rope walk begins. There is no safety net with other buyers in the mix, or reference points for how other third parties would value the business. Assuming that the parties are able to agree on a Letter of Intent (“LOI”) with basic terms, then the buyer begins an extensive due diligence process. Since the seller has not adequately prepared with its own seller diligence analysis, the buyer, at the end of its diligence process, will likely come up with several reasons why the purchase price in the LOI will need to be reduced. This is known as “retrading the deal.”
Seller is now in a difficult position having spent several months negotiating with buyer with significant legal and accounting fees to show for seller’s efforts. During this time, seller and seller’s staff will have spent countless hours working on providing information to the buyer and reviewing and analyzing lengthy documents. The diversion of Seller’s focus and efforts away from its core business can be very damaging to seller’s business. A decline (or cessation of growth) in seller’s business during the sale process will result in a reduced price at closing if the deal closes. If the deal does not close, Seller will have lost valuable time in growing its business and will now have to expend additional resources to regain its lost momentum.
When there is one buyer, the buyer has far more leverage than it would otherwise have if there were other interested buyers. Remember; “when there is one toy in the room and one child, the toy is worthless, but when there are two children in the room and one toy, the toy is invaluable.”
There are many cases where taking a company to market may not work for the seller and a lot of transactions are completed with a “one-off buyer.” The following is a list of reasons Sellers may have for not going to market and a response explaining why those reasons may not justify dealing with only one buyer:
- REASON – seller does not want anyone to know they are for sale.
RESPONSE – the marketing process can be tailored to make sure seller’s investment banker is only contacting, in confidence, only those specific parties as approved by seller.
- REASON – marketing the company to multiple buyers would take too long and require to much time and effort on the part of seller.
RESPONSE – the marketing process, when managed properly by a skilled investment banker, may take less time than dealing with a “one-off buyer” and is much less painful than a “do-it-yourself” process with that one buyer.
- REASON – seller believes their one buyer is the best buyer and will pay the highest and best price.
RESPONSE – with one buyer there is no competition or reference point for pricing and seller will never know if seller received the best price (and without competition, may receive a significantly reduced price).
- REASON – seller does not want to pay the fees charged by an investment banker to market the company.
RESPONSE – the services of an investment banker should result in an increase in sale value far greater than the banker’s fee (experienced sellers will even engage investment bankers if there is only one buyer in order to maximize value).
- REASON – seller wants to sell quickly and believes that working with only one identified buyer is the most expedient process.
RESPONSE – if a quick and easy sale is what the seller is looking for that seller is going to learn quickly that a “one-off buyer” will not be in any hurry to close the deal.
Seller beware! A process with only one buyer may work out well, but explore all of your options, make sure you have decided on the right path and be prepared for what lies ahead. In order to properly plan for the sale of your business, contact Roger Neu, JD, CPA at the M&A Law Firm via phone at (949) 863-1700 or email at Roger@RneuLaw.com.