The proof is in the pudding. It ain’t over ’til it’s over. Don’t count your chickens before they’ve hatched. Pick your cliché. Just because someone makes an offer to buy your business doesn’t mean they will close the deal.
As a seller, you need to look at more than dollar signs on a purchase offer. Make sure your advisors are researching and asking questions to figure out which buyers are for real, and which ones are just talking a big game.
Sometimes buyers want to rope you in to an exclusive negotiation. They throw out a high price, fully intending to negotiate down as they conduct due diligence and “discover” weaknesses in your business.
Some buyers have big egos and want to be the big dog at the table. But their balance sheets or lending relationships can’t really support the promises they’ve made.
Still others make what they believe to be legitimate offers with good intent. But if they’re not the final decision maker — the person controlling the checkbook— their efforts might be scuttled by a higher up, or a lender, who simply doesn’t see the same advantages in the deal.
These things happen more often than you probably think.
Nine warning signs your buyer can’t follow through:
- Too good to be true. They offer a super high price and a 45-day closing “guarantee no risk” if you’ll sign their exclusivity agreement. Your buyer may have ulterior motives. They’ll get access to your sensitive information and get you off the market (weakening your position). Later, they’ll try to renegotiate a sizeable haircut or walk away when you don’t accept their lowball offer. Either way, they gained meaningful competitive intelligence which could significantly hurt your business or its value going forward.
- Too vague. They won’t estimate cash at closing. They say, “We’re going to try to get as much as we can.” Or, “We’re not quite sure yet.” A good buyer should have an idea of how much of the purchase price will be paid in cash at the closing.
- Unclear funding plan. They won’t disclose their lending sources. A buyer isn’t qualified if they can’t demonstrate financial ability to fund the deal.
- Lack of transparency. They won’t connect you to their prior business partners. If they’ve done acquisitions in the past, they should provide seller references. We want to know what the buyer is like to work with and if they do what they say they’re going to do.
- “Hidden” history. They won’t disclose anything about their acquisition history. A buyer who keeps their past business under wraps may not have as much experience as they say they do.
- No digital footprint. We’re looking for a website, press releases and announcements of past companies the buyer has acquired. Ideally, we’d like to see a few published news items, too. Active acquisition firms want to get their name out there.
- Fuzzy deal terms. Once you get to the letter of intent (LOI) stage, you need to strike a fine balance between strict detail and vague conditions. While this is generally not the time to demand all the deal specifics, unclear deal terms could put you in a position of weakness later on. Alternately, a vague LOI could be a sign your buyer is kicking tires and not really committed to a deal.
- Slow to respond. Perhaps your buyer was engaged and enthusiastic at the start of the process, but now they’re taking a long time to get back to you. If there’s a noticeable change in communication, that’s a signal you’re no longer a priority acquisition target.
- No control over the purse strings. Buyers reps and corporate development teams aren’t the final decision makers. Business owners without enough capital to fund their own deals aren’t the final decision makers. These buyers have to sell your deal to their lenders or other equity partners, and that introduces risk into the transaction.
As you evaluate offers for your company, you have to consider whether one buyer is more likely than another to get a deal over the finish line. Some buyers are just bad actors, looking to take advantage. In other cases it’s a lack of time, money, information, experience or authority that can derail a deal.
M&A advisors are skilled at recognizing these warning signs and helping you avoid these types of problems. Contact Al Statz at 707-781-8580 for further information or to discuss a potential sale, merger or business acquisition need. Exit Strategies Group is a partner of Cornerstone International Alliance.