The Seller as an Obstacle for a Sale
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While there may be obvious, acceptable, or reasonable explanations as to why certain businesses sell faster than others, we discover that sometimes the seller poses the greatest threat to a closing. In this article we will outline some of the most common problems linked to the seller.
Team Molasses
Sellers usually have established relationships with an accountant, attorney, and personal advisor; a broker is perceived as an outsider with limited influence. Additionally, because broker’s services are free until closing, it may be assumed to have a limited value despite the broker’s expertise in ownership transfer.
While constructive advice and guidance are great assets, especially when someone is paid good money for it, the cumulative effect of “too many chefs in the kitchen” can slow or stop the sale process, introduce unnecessary noise to the transaction process, or even bring forth dead wrong advice. It is the broker’s responsibility to keep the deal in perspective, to be reactive to changing dynamics, and to offer creative responses to enhance the deal.
Sellers tend forget they are the final decision makers! They must realize that even when paying top dollar for advice, a chance exists that their advisors might be wrong.
Lawyers
Mark McCormack, an attorney and author of the book “The Terrible Truth About Lawyers” (Beech Tree Books, 1987), points that “… the overwhelming majority of what lawyers do takes too long and costs too much – because incentives for lawyers to be slow, contentious, and long-winded, are built right into the system…”.
In business brokerage context, we frequently see comprehensive, clear, and well drafted contracts tossed aside as an overplaying lawyer insists on a new contract full of legal mumbo jumbo and deal-killing contingencies.
Brokers can pronounce a good deal dead upon arrival when lawyers are allowed to do the deal rather than simply formulate it. When a lawyer starts making suggestions on the business aspects of a deal McCormack suggests to clients to give the following reply “WHO THE HELL ASKED YOU????”. Brokers and lawyers may often have a conflict of interest as brokers concentrate on results while lawyers concentrate on the process. This is the time for brokers to keep all parties focused on the deal, and on its timetables and deadlines.
Withholding Information
Sellers know themselves and their business best. Adopting a “you didn’t ask – so I won’t tell” approach regarding material information that might adversely affect the integrity of the business and its ability to secure financing should be disclosed to prevent mistrust and destroy goodwill. For example, we recently experienced a situation with a $20M business where the seller’s foul play from 15 years ago killed a “deal made in heaven” because the buyer was upset they were not disclosed that information by seller. The information surfaced three months into the process and although it had nothing to do with the business; however, due to the large amount at stake the buyer felt that the deal’s integrity was substantially damaged.
It is highly probable that a buyer will eventually discover undisclosed information during their due diligence which leads to suspicion, re-negotiation or withdrawal of the offer. Failure to include or mention material information, deliberately or accidentally, reflects on the broker’s reputation. Brokers should take their time to study their listings to the fullest degree to avoid this pitfall.
Misrepresentation and/or Flow Control of information
Catalyst Business Brokers operates in South Florida, and sometimes it seems that in this market we are one of the few companies that actually pays true taxes. It feels like everybody has multiple books….
Too often we encounter internally generated financial information that resembles a Christmas wish list that later is found to be vastly different from the actual tax returns. It is not unusual to see an internally generated balance sheet where the total Assets and total Liabilities are dissimilar or to learn from an “apologetic” seller that a major portion of his business is cash-without-trace.
Sellers can be, and will try to be, very creative when providing information to maximize the asking price, mostly leading to a major waste of time and energy. Therefore we advice our clients to properly prepare their books ahead of an anticipated sale of their business. Sellers find the following argument reasonable and very compelling: Suppose earning is underreported by $10 resulting in a saving equal to the tax rate, say $3. However, reporting the same $10, while increasing the tax liability by $3 will also increase your selling price by an earning multiple, raising your selling price by $20. Isn’t a $20 in your pocket better than a $3 saving?
Dr. Jekyll & Mr. Hyde
An effective broker can produce a willing, able and ready buyer in a record time. Sometimes, market conditions are ripe or an element of luck can play a role in finding this buyer so quickly. However, in some cases this may turn out to be detrimental to the broker as the quick turnaround time prevents the cultivation of relationship and trust with the seller, thereby resulting in little weight given to broker’s advise. Also, the seller may wrongfully interpret the quick turnaround as an indication that the asking price was too low, therefore refusing to accept a perfectly good offer.
Frequently we see capricious sellers that we refer to as Dr. Jekyll and Mr. Hyde: a seller before an offer is presented as opposed to the same seller when an offer is on the table. An offer may turn a perfect gentleman into …. well, something else that is not necessarily pleasant to deal with. The nice person before the offer can turn into a volatile, erratic or dishonest person. They would try to circumvent the broker, provide conflicting information, volunteer irrelevant information, turn vulgar including using profanity when speaking with the buyer, become uncooperative, showing off, and instructing the broker how to carry out their job. This can turn into a gratuitous mess that at times is best solved by graciously suggesting that the seller seek another and better suited broker.
A selective broker, using good judgment to determine all problems and opportunities presented by the seller and his business, increases his chances for a successful closing. Forging a relationship with the seller that is based on respect to the broker’s abilities and capabilities as a true professional, will help keep the seller’s focus on closing the deal while keeping the process effective, efficient and seemingly under the seller’s control.
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