Transcript for:
Mastering Private Equity structuring a formal sale process for max value and Sales

hi I'm Paul janor I'm an investment banker and I negotiate for a living primarily the sale of businesses I've been doing this well over 20 years and the majority of what I've learned is actually hardfought battles out in the field getting deals done you know there's been a tremendous amount of ink spilled over the years in negotiation and quite frankly there's a lot of great books I've got getting to yes never split the difference bargaining for Advantage some of the issues that I have with some of these books though is while they're great if you're going get involved in hostage negotiations or budget negotiations in Congress or signing an international treaty when you're trying to sell a financial asset they're not particularly helpful because they focus largely on the Cooperative nature negotiations probing problems finding Solutions finding common ground getting to yes at the end of the day though when you're selling a business it's not that simple and what we're going to talk about today is some of the Dynamics and the skills that are required to be a great negotiator because in my mind all else being equal the best negotiator is going to really be able to maximize the value of his or her business right and so understanding the Dynamics at play and also understanding how to create a formal cell-side process because negotiation really is a process and I think if you read some of the literature you'll quickly see that negotiation is in itself a process process so understanding the process how to be a process Setter how to control that process will for you as a seller put a tremendously greater amount of cash in your pocket now before we talk about negotiation in and up itself I wanted to talk a little bit about valuation and price you know a business is not like a pack of batteries right it's got a price tag on it you go into the store it's $6.99 you buy it business doesn't have a price tag the price of a business is arrived at at the bargaining table through negotiation and so all else being equal the better you are at negotiating the likely higher price you're going to get and the better terms you're going to get for yourself today we're going to craft a formal cide process and I'm going to take you through what an investment banker does or a cide advisor when he negotiates a cide m&a deal so the sale of the business but before we get into that I wanted to discuss a a lot of aspects to negotiations that people really don't talk about and there is somewhat of a structure to this and when you think about negotiations in general um some components that come to my mind instantly and one of the most important is leverage or power and I'll use those interchangeably today throughout our discussion but when I talk about leverage I tend to break that down into a variety of different factors right um for example you could have leverage Against The Other Side by using deadlines that impact them and don't impact you you know if you think about a labor negotiation right we're going on strike it's happening tomorrow at midnight and you know all of the concessions tend to happen right before midnight that's a deadline that impacts both the buy side and the sells side effectively but you also have deadlines that would only impact one side so for example if if you want to buy this business you have to Tender an offer by 5:00 p.m. on Friday otherwise we're not bringing you into the process you're out you have no opportunity to be able to buy the business that doesn't affect you the seller it affects the buyer and so time is one attribute to leverage another attribute to Leverage is extremely important to consider and probably in my mind the most important is optionality or competition and I'll use those two terms interchangeably you know whenever you have an asset and you increase the number of buyers that are vying to acquire that asset you're naturally going to raise the price I mean if you think about a public auction right and you're selling a van go painting if you've got one buyer sitting there with his paddle out in the audience versus 100 it doesn't take a whole lot of common sense to determine you're in much better position having a lot of buyers out there right so competition is an extremely important aspect of Leverage but there are other aspects of Leverage that are somewhat under the surface and those are aspects such as necessity or desire so when I think about necessity you know it's not often that somebody's in a position where they have to sell their business now it happens from time to time I've seen um I've seen business owners pass away and the family being stuck with a massive estate tax bill and being forced to sell right so that does happen deaths divorces could you know maybe not create necessity but at least a strong desire to dispose of an asset so necessity comes to play so for example if I had a business and I wanted to sell it and you came to me and said hey Paul I'd really like to buy your business and I needed to sell for whatever reason let's say that I if I didn't sell it I was going to go bankrupt because I have a lot of loans I've got to pay off well the last thing that I would do as a seller is telling you that this is a forced sale or a fire sale right I mean that would dramatically undercut The Leverage in our discussion so I would want to conceal that fact the same thing comes in when we talk about desire or the disparity of Desire between a buyer and seller you know at the end of the day who wants to do the deal more um tends to have the least amount of Leverage in that sort of discussion you know the old saying is nor get the best price you've got to be able to walk away now clearly that works up until a point and then sometimes you literally find yourself walking away with no deal and we're going to talk a little bit about how to deal with that situation but leverage or power is extremely important and what I'm impressed on you today is that Leverage is often not absolute Leverage is often perceptual so just like beauty is in the eyes of the beholder leverages often times in the eyes of the beholder as well and both sides both buyer and seller can mold perceptions by how they run a process and they could appear to be far stronger than they are and so going into any sort of negotiation you really need to think about perceptions so guarding perceptions on your side but really understanding what's going on on the other side and there's a few ways that you do that one of the ways is through the use of information or knowledge and this is an important attribute to a phenomenally skilled negotiator is to be able to far it out information on the other side that helps you appreciate leverage factors and conceal information on your side of the table that would potentially provide negative leverage to you so concealing the fact that I absolute have to sell my business otherwise I'll go bankrupt that's an that's information that I need to conceal now on the other side of the table you might be trying to far it out as much information as possible in order to understand how badly that acquirer needs to actually buy a business right is it a defensive play do you have a business that if acquir a were to buy it would keep acquirer B out of that market therefore acquir a would be willing to pay more money for that um is there an executive at the acquire whose L job is on the line pending this acquisition so there's a variety of of of instances that can impact the disparity of Desire between the two parties and it's your job on the cell side to F that out and that often doesn't happen through direct questioning it's putting together the Mosaic right it's a lot of reasoning through Imports it's spending a lot of time listening it's spending a lot of time doing research before you even start the process but the flow of information is an extremely important aspect of a negotiation process we're going to go further into that as we walk through a formal sset process another key aspect is judgment and this is often where inexperienced negotiators really get their asses handed to themselves you know the old say you've got to know when to hold them and you've got to know when to fold them you've got to know when to Bluff you've got to really understand um what sort of Leverage actual leverage exists on the other side what sort of actual leverage exists on your side attempt to mold the perception of the other side so that they believe that you have more leverage than they do and then you have to use judgment as to your interactions um between the parties and a lot of this judgment really comes down to emotional Detachment you know I've often said that the worst person to negotiate for me is me I am too emotionally attached to my own assets my own life to actually be a good negotiator on my behalf but I've learned this actually at a young age because I've spent the majority of my life negotiating on behalf of others that I know I'm not a good negotiator so when I buy a car I don't even show up personally at the showroom I might go and test drive a car here or there but when it's time to negotiate the purchase of that car I send somebody in almost all of our big corporate negotiations um get done by somebody else not me and there's a benefit right to putting the decision maker in the background if I'm the decision maker and in your case if you own a business and you're the decision maker it doesn't make great sense for you to be at the bargaining table now having an agent bargain upon your on your behalf and having some authority to make some concessions and score some wins of course is extremely helpful but at the end of the day stepping back from the bargaining table and remaining very emotionally detached and P will allow you to operate under pressure it will allow you to the threats from the other side to basically just roll off your back and you'll make far better decisions and I guarantee if you remain emotionally detached and you allow somebody else to negotiate on your behalf you likely have a much better outcome in addition to exercise in great judgment another very very important attribute to a outstanding negotiator is building credibility and I don't think a lot of people think about this particularly those that are not particularly skilled in negotiating uh prior to starting a process um you know when I was in private Equity I would go out and acquire businesses you know our firm would reach out to business owners so if you're a business owner out there you probably get emails you get calls you get buy side Brokers tracking you down saying hey I represent XYZ private Equity Firm they're really interested in your space they want to do a deal we love your company it seems great give us a call let's have a chat so in my capacity at American Capital which was the largest publicly traded buyout shop at the time the firm would make a lot of reach outs we would um hear from Sellers and we would try to build relationships with them and the first thing that we try to do is get investment uh from the potential seller because the more time and effort somebody invests into a process into a buyer the more likely that they are to actually go through a deal so we would try to get out in front of them quickly take them out to dinner whine them and dine them and have them invest in a relationship we were also trying to build credibility you know that we would actually to do what we say we would do but one of the things that I think was lost on a lot of the sellers who represented themselves in some of these transactions is it's really hard to negotiate with somebody if they don't believe what you said and I'll give you an example of that let's say um I work for the private Equity Firm I'm talking to Jim Jim's very interested in doing a deal with us he wants to sell his mechanical contracting business it's a $20 million firm and we put an offer on the table for 20 million bucks but Jim wants 30 um Jim might spend a lot of time having discussions with us he might poo poo the offer hey I really wanted more than 20 I really wanted to get 30 to get this thing done and then as we start to put the LOI on the table or the letter of intent all of a sudden Jim out of nowhere says well hey I've got another offer for 32 million um so unless you can match 32 million I'm going with the other offer now Jim may have been telling the truth but more times than not Jim was bluffing and if Jim hadn't done the work to build up The credibility throughout the duration of the relationship the easiest thing for us to do is call his bluff now calling a bluff and we're going to talk about this a little bit later in our discussion is not always the right thing to do because you know the worst thing to do is he tells you I want 32 million otherwise I'm not doing a deal with you um and you were actually willing to pay the 32 million but you said no way and called this Bluff and it turns out he was bluffing and then somebody else came in the next day and bought it for 31 million and those sorts of things happen so so there's some Dynamics at play with regard to bluffing which we're going to discuss but you know building up ver credibility is very important because the more credible you are um you know in any sort of negotiation there's going to be aspects that are extremely important to you and some that are not uh you might be particularly concerned about price but you don't care so much about a whole back turn for example if you've built up that credibility and you're able to trade those things with the other side the other side actually believes you you're going to have a much easier time getting what you want and at the end of the day exercising power is really getting others to do what you want [Music] now as we discussed earlier negotiation is a process and one of the most important questions that I have to answer as an investment banker is what process are we going to use you see as a cell-side m&a adviser I'm negotiating two things simultaneously I'm negotiating process so the rules and how the buyers have to work with us as well as the substance so the price and the terms of transaction there's somewhat of a smallus board um of options that I could choose from a process perspective but at the end of the day in order to create a process that really maximizes the value and the price for my client I need to form a process that incorporates everything we just discussed right number one a process that allows us to ascertain information about every buyer what are the buyer motivations what are the buyer incentives are they the the level of Desire the buyer has in order to do the deal is there any buyer that has a necessity to do a deal which is extremely rare but it can't happen so it's fiing out information also my process needs to be able to protect information and conceal information on my side so I've got to be able to conceal my client's desires his or her necessities how badly they want to do a deal uh if there's any particular problems needs to be concealed and so the process has to help me with that number two the process has to provide maximum leverage through optionality meaning I have to have enough competitors in here to drive up the price right I have to be running my own auction I have to have a lot of buyers bidding against each other to help me raise the price and so in the process that I need to create although I will be doing some cross table negotiation right I will be negotiating directly with a buyer I also want buyers to be doing same side of the table negotiations if you imagine a handful of buyers sitting on the other side of the table I want them negotiating amongst themselves through competition to bid up price so the process has to F down information conceal information it has to introduce the concept of competition which gives me Leverage I also want to be able to use time right so in setting the process rules I will be setting deadlines throughout where all buyers will have to act simultaneously there's bid deadlines where bids have to be submitted at a certain time I need to be able to control that and that allows me to set a deadline that impacts the other side simultaneously but does not impact me right so I'm using time I'm also using time for other advantages I'm using time from an investment perspective I've got one unique asset my client's business I've got 25 buyers I want each of those 25 buyers to go through a process to continue to invest time money and resources as well as time into the relationship with my client the seller and the seller actually is doing that simultaneously with 25 buyers so I'm able to create a tremendous amount of investment over a period of months with the buyers uh which will positively impact the leverage that I have in the situation so I'm using time I'm using information I'm using leverage through competition and I'm also strengthening my credibility from the very onset let's say that you own a business and you've been talking to one particular choir for a few weeks now you've gone out to dinner he's come to your office you started to talk some numbers you've shared some numbers he comes back and says I want to buy your business for $20 million and you want to sell it for $30 million if this goes on for some weeks and then at the very last minute you tell him hey I really want more money for my business I'm going to go out and introduce competition into this process I'm going to go out and talk to some other acquirers this could do one of a couple of things number one the buyer could automatically get his acting gear because he doesn't want competition and he could raise his price or two and what's often very common is he'll get frustrated he'll feel like you had built a rapport with him that you wanted to sell your business to him and then all of a sudden now because you weren't getting your way you were going to introduce some competition um which is adverse of course to his position and so that frustrates the relationship and you lose some credibility and I'm a firm believer that if you start from the onset in reducing all the leverage factors and molding the perception to the other side you can maintain credibility throughout the process and what I mean by that is by bringing competition in right off the bat where all of the buyers know that there's a variety of buyers here this is a formal sell-side process they will be competing against other buyers in order to have the opportunity to buy this asset you're not switching anything up on them last minute and you can maintain that credibility throughout the process so these these key components go into how we can construct a formal cide process that will maximize the value of your business and here's how this works in practice when a seller comes into me and says hey Paul I've got a $20 million in Revenue lawn care business and I want to sell this company um I would like to sell it within the next year can you take a look at it and one of the first things we do at pic is we'll execute a non-disclosure agreement we'll say sure send us your financial statements we will ask some questions we'll spend some time with the potential client on the phone we don't even ask for an engagement off the bat we'll just sign an a disclosure agreement we'll do some upfront work and we'll take a look at the business and we'll determine what we think it's potentially worth and we'll have conversations with the um with the seller and that of course is part of the whole information process and what I mean by that is we have access obviously due to all the transactions that we do and all the data that we have we know what all the comparable acquisition statistics are so we know what other Lawn Care businesses are on the country trade for and we can use some of that to inform our valuation decision with regard to that particular client but you know that's not end all be all I I think we should always keep in mind that comparable acquisition statistics can be helpful but there are a lot of instances where you know those tend to just be averages and there tends to be a lot of outliers some really on the high end some on the low end so an adviser that has great experience in judgment is going to be able to help you kind of understand where you fit so the first part is beginning to F it out information what do the comps look like what's the valuation and market conditions in the current market what are the likely buyers right is this business in an area where um you might have some defensive acquisition activity taking place is this where private Equity firms are acquired platforms are doing add-on Acquisitions there's a lot that goes into this but by using all this information you're able to determine and set realistic expectations so the the first part of any sory of sside process is understanding what realistic expectations are what are you likely to sell this business for and you know before we ever go to market with client I like to be able to see eye to eye and over the last 10 years as we've seen valuations continue to ramp up I mean we've lived in an era of asset price inflation right valuations I look at the stock market even today it's it's still pretty close to an all-time high so valuations have continued to increase this has benefited the owners of businesses and financial assets and often times our realistic expectations when we go out into the market tend to be conservative really I mean were surprised quite often to the upside and I will tell you back in 2009 and 2010 we were very often surprised to the downside and quite frankly we were surprised so much a lot of the deals didn't happen right I just talking the other day I remember in 2009 just a very small number of deals even took place but in this particular Market setting realistic expectations so let's just use some random examples here you've got a business and you say you know what I'm sitting down with my adviser we're taking a look at the comps we're running a DCF we're looking at a transaction model we're tweaking things we're going to try to go to Market within the next 12 months there's a variety of little tweaks we can make to the business but for all intents and purposes Within the year out there's not a tremendous amount you can do but now we know that this business will likely sell for $50 million right so this is a this is kind of like the mey part of the bower this is likely where will happen now if you get Super Lucky and a new acquir comes into the market or a private Equity Firm decides they've got a pay to play and that's a perfect platform could you get 55 could you get 60 could you get 75 yes that's see it happened just this year we went out to Market with a company that we thought was get going to get $50 million in private Equity Firm came in I paid 75 million for it so those things do happen but setting realistic expectations will kind of help you um on the onset one of the things that I have to fight against personally and I've had to do it for over 20 years when you're involved in a lot of transactions and you're seeing you know 50 pest control or 50 Lawn Care deals per year and you're seeing that all of these purchase price multiples tend to Cluster in a particular area it's very easy to look at the subject company and say okay based on the cops this is what this thing is selling for this is going to sell for $50 million and you tend to lose the high expectations and aspirations that you would otherwise have and I always talked to my team about you know it's important for us to be forthright with the client like hey this is the reasonable expectation $50 million but when we go out the market we're not shooting for $50 million we're shooting for 80 right we'll shoot shooting for a very aspirational price and one of my earlier talks I always talked about negotiate like a child when kids want something they don't take no for an answer like no is just an opening bargaining position right a kid wants ice cream goes to his mom his mom says no you're about to eat dinner no ice cream fine I'll accept that no that was was it really know I'm going to go to my dad dad can I have the ice cream they begin to divide and conquer and they just have at it and they Yap until somebody gives in and they ultimately get it so having high aspirations right having the aspirations of a child like I want to go to the Moon I'm going to be an astronaut is very important for m&a advisor and it's unfortunate because I do see it quite often that m&a advisers will want to just get a deal done and it's safe to do a deal in range right that's where Market is let's get it done chop chop chop TR and burn but here at my firm at ptoc we always Focus on having extremely high aspirations which by the way is sometimes difficult working with a client because we tell the client it's likely 50 million but we're aspirational that we can hit 80 now of course the second the word 80 comes out of my mouth the client anchors to 80 and it's an $80 million business um but I would rather take that risk and have them anchor High than be set on the 50 because the higher our aspirations the greater the chance that we're going to exceed that so again it's very important to give a realistic range to the client but it's also very important to come up with the aspirational range which I typically tell clients like listen if lightning strikes twice it everything goes in your favor if a buyer comes in and absolutely needs to buy this business in this particular location the business has the right capabilities All Stars aligned you have a possibility of getting all the way here now chances are of that happening are slim but it's a possibility um listen I know clients never come in with a $20 million business and say yeah you know what I just want 10 million bucks from my business I know clients always want more than their business will likely sell for in that reasonable range but again setting aspirations is important because in the game of negotiation so much of this is psychological right so much of this is perception so aiming for the Stars it's the only way to put you in a position to actually be able to do that so you need to do that with each client so now that we've done the research right we've taken a look at the business we've gotten a sense for a realistic range we have an aspirational number that we want to hit now it's time to start to craft the process we've got to put together a formal game plan and there's a variety of ways to sell a business and they're on a spectrum on the one end of the spectrum we have direct negotiation between one buyer and one seller which is largely the worst way to ever sell a business it us usually ends in Failure low prices and disappointment on the other end of the spectrum we have what's called a controlled auction process it is a very formal rules-based process and you have this spectrum the majority of Middle Market businesses though and when the processes run correctly are typically sold somewhere in the middle which I refer to as a quasi auction or a modified auction now I'm not going to go into auction Theory today I did a speech earlier this year at the AO conference uh we'll put some a link in the comments you can take a look at that if you're interested and understanding more about the difference between a control auction a modified auction and how all that works for our purposes today we're going to focus right in the middle at the modified auction and that is the best process typically for Middle Market businesses and if your investment banker um is worth a salt this is the process that he's going to construct so we've got realistic expectations we have an aspirational price now it's time to look at the acquisition Universe again leverage we're going to think about leverage and power and the best way that we can get Leverage is competition so prior to going out to the market as we're formulating our game plan we're going to do some research on the acquisition universe and we're going to look at all of the publicly traded National companies that are in your industry right if you own a lawn care business we're going to look at the national players we're going to look at the private Equity backed players we're going to look at some of the players and depending upon how big your business is we're not going to call local competitors all times do make sense we're going to be as broad as we possibly can with finding the acquires to put into the acquisition universe but we're not going to boil the ocean we're not just throwing things up against the wall I know a lot of times business brokers will sell businesses through listings right and they'll put a listing online which to me was always somewhat asinine I mean it's almost in in some ways it's like selling a you know an antique Strat ofar violin on Craigslist it just never really made sense to me and the facts speak for themselves the processes uh usually don't use the seller nearly as much um as they should if you actually go out hunting as opposed to Just Fishing and throwing your you know throwing your bait in the water to see what bites no you've got to be hunter in this particular case you've got to get very sophisticated about the acquisition universe so go out and figure out what private Equity firms want to be in this market what private Equity firms are in this market what national players are in this market and now you start to build an acquisition universe so you've got a list of acquires and as you start to think about the list of acquires and you're working on fine-tuning the business and you're putting together what we'll often times refer to as a sinim a confidential information memo sometimes it's called an offering memo sometimes call a book I mean there's a variety of terms for it but effectively what you're doing is you're taking the financial statements you're summarizing the business the operations the employees the history so on and so forth and you have a memo that might be 30 or 40 pages long and it's this memo that every acquirer is going to have an opportunity to take a look at and they'll be required to make their initial bid based on these materials so we figure out who the acquires are and then we think about as we're drafting the Sim now we set up a timeline the timeline is very important because again one of the most important things that you can do on this site is Control process so as a sell-side adviser you are establishing the timeline when the non-disclosure agreements go out to buyers so every buyer will sign a non-disclosure agreement and if your adviser is doing his job the non-disclosure agreement will have certain non-solicitation terms in there so that buyers can't get your materials figure out who your employees are and say oh man this guy looks great let's go out and see if we can hire up now you want non-solicitation of employees and customers built right into that non-disclosure agreement but the non-disclosure agreement will go out first then the sside materials the Sim the acquirers will have an opportunity to review that submit some questions and then the process Carries On from there and what we've done is again using these key ingredients and Dynamics from negotiation we've begun to build leverage right we brought in optionality from the get-go we're maintaining our credibility because it's a formal sell site process and all the buyers know that a variety of different acquires will be looking at this um we are controlling this process because we're setting the T the timeline and and what will typically happen in a Control process like this is the materials go out the door the acquirers might have two weeks they might have a month it depends and this varies and it varies quite frankly based on seasonality right like so sometimes if you were to go to market in late fall well you know thanksgiving's coming up you know Christmas is coming up you can't really push acquirers to move quickly that because people take a lot of vacation same thing in summer like July is a horrible time to put acquires under you know a twoe deadline so you have to be cognizant of seasonality um but it could be anywhere from a couple of weeks to a month and at that point in time what we tend to ask for is we'll send out a letter a process letter along with the SIM that'll say on Wednesday the 15th at 5:00 pm your proposal for the acquisition of XYZ company is due this proposal should include and we want to see a variety of different things we want to see um price and we like to see it in an absolute term as opposed to a range I'd rather see I'm paying i' I'd rather see it say we're willing to pay $35 million versus we we're willing to pay 30 to 35 I want to know what the structure of the deal is you know is there seller notes are there any sort of holdbacks are there any earn outs or contingencies what does that look like a statement of intent what do you intend to do with the owner what do you intend to do with the employees um financing like do you actually have the money to do this deal or you have to borrow it so there's a handful of components that we request to be put into the proposal but that initial proposal is typically referred to as an indication of interest it's often times a document that's one to three pages it's B binding it's a friendly letter that says hey we loved the opportunity of reviewing the materials on client we're super excited about the space we think it's a great business we'd be willing to pay X for it here's how we structure it we have cash on hand just write check get the deal done here's what we're going to do with the team so on and so forth would love the opportunity to meet with management now those proposals are all due on the same day and there's a reason for that it is very very difficult to review proposals serially you want always want to look at them in parallel it it it's the ability to compare and contrast offers which allows clients and their advisors to determine which proposals are better and this process by doing it this way keeps the seller away from the age-old problem of um revealing information and so I want to talk about this so we're using this deadline this time here to build leverage um but this deadline also allows us to conceal things and here's what it does if you go out to Market let's say that you're selling your business and you talk to three different buyers and you're having some conversations and you know each buyer says hey give me some financial information I want to take a look at it and you hear from all buyers and all three of them want to do some sort of a deal and they want to put together proposals or letter of intent if you don't have a deadline now you're waiting right you're sitting there you're waiting and so let's say you know Jim at aoir a shows up and says hey Paul here's my offer I'm super excited about buying your business I look at it and I'm okay it's a $10 million offer seems great I wish I could get more but maybe it's acceptable I'm not sure it depends on what the other two are going to do now I'm waiting for the other two and Jim happened to put at the bottom of the offer that hey Paul You've Got 5 days to consider this you either accept it or reject it and if you accept it please sign and return it to me so now I've got an exploding offer so what do I do well I didn't set a deadline and now I'm calling Dennis and Ryan Dennis and Ryan are the the individuals at the other acquires and I called Dennis up I said hey Dennis you said you're going to put on an offer I'm just curious you know what you're going to do um Dennis starts asking questions like hey I didn't think you were in a rush and you want to try to build competition for yourself so hey I got an offer from another party and then I said well how much was for and you're like I'm a little uncomfortable saying that and you guys go back and forth well you've done one good thing which you've int introduced comp competition um but now you've put yourself in a bad position because when we talk about disparity of desire you are actually making the phone call right you're chasing the girl now and so you're calling Dennis and you're going to be calling Ryan as well and when you start asking for their offers um a lot of times makes them start to ask a lot of questions and really try to put you in a POS really try to understand the position that you might be in and now you could say hey I am interested in moving this forward quickly because I have another offer that's going to explode but if you haven't built the requisite amount of credibility why should they believe you like you could be bluffing about the other offer you could actually be desperate to sell so now you're you find yourself in somewhat of a pickle and I know from absolute objective fact from historically doing deals every single time when I was in private equity and every time a seller called me looking for an offer or seeking feedback I knew I had somebody that had more desire to do a deal than I did right and so that definitely plays in the calculations as to what I'm willing to pay and it absolutely should you've put yourself in a bad position you haven't cons just you haven't said I want to sell but your actions are speaking louder than words and sophisticated buyers are paying attention ition to this so how do you avoid that at the very beginning of the process you set up arbitrary deadlines you want to play there's when you got to pay you've got to Tender your offer on such and such a time and now you're not calling these guys and if they blow through the deadline and you know sometimes as an adviser I'm flexible if people call me up and say hey we really want to do this deal but boss man's on vacation and I can't get an approval on Monday no problem like deadlines are made to be broken sometimes but at the end of the day it puts me in a position of power and it puts you the client in a position of power because now we're not we're not revealing anything right we' set this up from the get-go this is when the deadlines do no one's chasing anyone buyers come to us so the first deadline is for the indication of interest and that indication of Interest really kind of establishes we say it sets markers right we've got if we're lucky let's say that you know in a typical process that we're doing now in the resian Commercial Services space would usually go out to somewhere between 30 and 40 private Equity firms and then somewhere between five and 10 actual strategic acquires and might be national players in a space they may be large regionals they might be private Equity back platforms but in any given deal somewhere between 30 and 50 ndas go out and the majority of those get signed and then somewhere between 30 and 50 um information memos go out to those buyers and they're invited to to provide us a proposal by the deadline uh in the form of an II we get the ioi and now we're able to lay them side by side if we're lucky let's say 50 go out and we get 10 IIs I would say that's a really good day right we've got 10 IIs you've got 10 firms now I know that right off the bat probably half of those five of those are some 23-year-old kid working in an office just writing IIs and the boss looks at it says yeah throw it in let's see what we can do but we've got 10 different things to look at and from there you know the sell-side process is really a private you know it's a concealed bid private auction is really what it is and so we are going through iterative bid phases and so we started the II and then the next phase would be okay in order for an acquirer to really get a good sense of whether or not they want to do a deal they have to meet with at least the owner and likely the management team and it depends upon the size of the company but for now for our purposes today let's say they're going to meet with a small group of the management team of your business three people in a negotiation there are concessions and there's reciprocity there's always quid pro quot so acquires you have tendered an II you want a meeting with a management team you have to do something for me there's a quid pro quo you have the ability to buy the option to sit down with management but it's going to cost you so I've got your II this is not going to cut it this deal is not going to transact at this price you need to revise your bid forward raise your price change your terms here's some of the things we don't like on your II and if you're willing to do that we'll know you're a little bit more serious and we're going to be willing to sit down with you and so you cause all buyers to purchase the ability to sit down with management team there's no free ride in this they revised their offer they start showing us what we want now they can sit down with management so in that particular case we get the IIs and we might say the first bid is due on you know June 1st right you got 10 days revise your bid you have five days what have you and depending upon the time of year Well we would change the structure here but let's say you got five days now in that particular case we might lose three right we might get seven revised bids three might say Hey listen I'm not willing to pay more than that so now we've got seven and we take a look at that and then we as advisers have some decisions to make because although at times price terms may all cluster and it may be very very close but at other times there's wide dispersions right we might have a $15 million offer a $19 million offer a $24 million offer different sorts of structures so we have to determine who we're going to let to see management and you know old standby position is start with the lowest you know if you've got a $24 million offer and you've got a $17 million offer you might go to the $17 million guy and say Hey listen you're really off the markk on this and while we appreciate doing business with you it makes SC sense to have a meeting when you're the lowest offer we have at hand so if you're serious I would in good faith revise your offer forward and we'll see if it makes sense for you to get to have a sit down with management we might do the lowest offer and the second lowest hell we might do that with all of them I'm not quite sure yet um and kind of get that feel as we go through the process but if we do that and let's say another one falls out and a few Revis your bid forward now they have the management meeting and so they sit down with management and of course after the management meeting ideally What's Happening Here is this management is building a relationship with each buyer so they are investing time and energy into each buyer and the buyers investing time resources into the relationship we want investment on both sides sellers I I know that this is very cliche probably goes without saying but I I see this as such a massive problem I can't not say this and if you're an m&a adviser out there you're going to laugh at this because it boggles my mind how very sophisticated very kind gentle individuals who have built great businesses could actually sit down with buyers and be total dicks and be condescending Pricks like if you are a seller every time you sit down with a buyer in a controlled environment in a manag mement meeting you should only have eyes for that buyer you should be smiling pouring coffee you should fight all all all desire to run your mouth because you get far more information from listening than you do from talking so be sweet be kind take notes have a notepad take notes as buyer talk listen work with your advisor and make sure you've got a full list of questions do your research on that private Equity Fund do your research on the acquire do your research on the individuals have sophisticated wellth thought out questions in order to ascertain information because again this information this is your opportunity to get a ton of information that you will use and we will use as we move through through the process and try to ratchet up the price so again be sweet be kind be very humble listen be emotionally detached don't take anything too serious have fun have fun smile and have fun this is what you need to do I mean I I say this to every single client and just like I say and sometimes they go in there and do the exact opposite so I guess now I am officially putting it on public record this is what I say Do It um so you go in you sit down and a management meeting is basically a situation where the acquir will walk in with the sinim so they studied the Sim and they've got a variety of questions and they may have sent over some questions in advance that we'd be prepared for but the acquir sits down and says hey Rob love your business super excited about it I've got questions about your president I've got questions about your HR process I got questions about your operations I've got some random questions on the financial statements and it looks like you guys had some non-cash charges last year what happened there oh we did some rebranding so you tend to have a relatively informal and sometimes these are more formal and structured but it's a relatively informal meeting where you're answering a lot of questions you might do a brief presentation on the history and the overview the company and talk about some of the competitive advantages you have but it should be a relaxed and friendly and humorous situation and then you H dinner again your goal is number one get information number two conceal information if you're getting a divorce the acquir doesn't need to hear about it if you're wife is badgering you to buy the $5 million yacht uh for the vacation you've got planned next march and you need get the company sold don't talk about it um if you're facing a bankruptcy situation or there any anything that potentially increases the necessity or desire for you to do a deal concealing that is not wrong right just don't talk about it but figure out what the other side's up to Why does the operator from the acquire want to do this deal how much value is he going to be able to create so hey John I love the fact that you guys are interested in my company it's taking me my whole life to build this I really want to find the right home for it I care a tremendous amount about my people you seem like the right guy to be able to pull this off if we combine these two businesses what are you going to do with it like how are you going to be able to create value for XYZ core now John's an operator he's not a negotiator like you might have the Corp Dev guys here you might have an m&a guy but they often bring an operator who actually can understand your business and the operator might talk might say hey this your Pest Control business $50 million business here's what I'm going to do I um if I combine it in my area I can get increased route density I can shave off you know 300 basis points of cost off the gross margin line um we've got a lot of redundancies here I can remove a million dollars in cost here I can do all these sorts of things hey you guys have a great capability I can take this mosquito capability and roll P across a billion dollars in revenue and increase my set these guys will go on and on and on and on and that's what we need to know because at the end of the day when we get to the end of the process we're going to reverse engineer we're going to say okay how much value does acquire can acquire a create by doing this deal now in theory all synergies created in a deal whether Revenue enhancements or cost synergy should belong to the buyer because they're writing a check that's not the way the world works when I've got a bunch of competitors vying to buy a company we're going to extract as much of that value creation for ourselves the self side and if we really understand what that looks like because we've asked the right questions we didn't talk too much we were friendly and we got everyone else talking to us like what what are their incentives like hey John you're the operator like if you do this deal what happens like how how does this impact you well you know my budget's going to be bigger and you if I get this thing uh you know might increase my bonus by 20% that's great you know m&a guy oh you know I get bonused on how much capital I commit so now we know that hey I've got some direct buying from these guys like I'm I'm negotiating with a corporation but am I really no I'm negotiating with guys who have jobs who have families who want money and now they've just revealed to me that they've got fincial incentives like if I was blabbering the whole time and talking I would have figured that out so figure that out because we're going to use that now before we move on from this meeting which effectively is a first date I want to break this down a little bit and I want to talk about roles here now as investment banker it's my job to prepare you with questions help you figure out the questions help you understand who you're talking to help you understand what it is they're going to try to want to understand from you the business owner and you should really think about this as almost a first date with a woman you are a handsome charming man quite successful you meet a girl you have a conversation you exchange a number now this woman doesn't know you right and so she's had a quick conversation with you she likes the way you look you seem to be reasonably successful you're charming so you exchange number you set up a date with her and you go on with your life now while you're going on your day-to- dat business in the same way the acquirers have read the S and they're going on their day-to-day business she's beginning to think about who you are as a man and again she doesn't know much about you so she's creating these images in her mind of what you could be right is this her final opportunity to quit dating right she finally find the guy and are you the guy and she's creating these ideas in her head of who you are so how do guys screw this up they go on the date they talk about themselves the whole time they run interview questions with a woman they um they basically ruin the illusion so the image that she had in her mind of who you are like you've actually told her who you are and that's not exactly what she was thinking so don't screw this up right it's the same way with the meetings with the acquirers like you're going to continue to be the Charming handsome man you've done well for yourself got the nice comp company you going to be friendly you're going to be playful you're going to listen to questions you're going to answer them you're going to ask engaging thoughtful open-ended questions but at the end of the day there's nothing that you're going to be able to do at this meeting to cause somebody to say hey I definitely want to pay more for this business because this guy is so awesome but you have this distinct opportunity of turning them off and saying like hey we'll buy this but we're not paying a crazy price or yeah we're just not interested so going into these meetings you're not looking to Dazzle you're looking to do um damage mitigation at all cost that's how you have to look at this and from my perspective as a banker what I'm trying to do is I'm trying to mold perception on the part of the the acquir I'm not only trying to far it on information I'm taking notes but I'm also trying to make sure that the acquir understands that you've got a lot of options and you're going to naturally come off like you have a lot of options cuz you just met with 10 different women in a 3-day period you're super excited right you're the guy at the bar and all the chicks are coming up to you that's how I want you to feel and that's how I want you to naturally come off and so doing these meetings and getting yourself into this mindset I think is very very important um because again as I said earlier in the discussion so much of this is perception versus reality and so much of this negotiation game here is psychology so we've got high in your own Supply you're all hopped up you're um charming and you're funny and you're humorous and you're asking great questions and you have a good meeting and you're very friendly to the acquires and then we move on to the next day after all the meetings are done now it's time for us to ask acquirers to Tender a formal Loi now up front they may have given us an II and then an Loi but now we're going to ask them to revise your bid once again and in a sell-side process I never know how many rounds of bidding there will be sometimes there's one sometimes there's 10 I never know what I'm trying to do is each round eliminate acquires push everyone up higher and the lower ones I want to boot them from the process so on day two I ask for revised bids and I say um next Monday at 5:00 p.m. please tender your revised offer in order to effectively stay in the process and we will continue to do that and and every time I ask for a revised bid I'm providing more information so of course after that initial date that you had with them the acquires will have a lot more questions right they're going to I'm going to ask for a revised bid and they're going to say hey we need to understand Trends and gross margins and what's going on with this big client and we noticed this and we had issues about HR that we talked about and how can we grapple with that a million different questions but we will answer those acquirers questions but in exchange for that they're going to have to come in with a higher bit and you know the best way to deal with that and again every process is unique what I will typically do is let's say after management meetings now I have five Bonafide acquirers that want to do the deal we had 10 three fell out then we have seven now we have two fell out we have five so now I've got five bids that have all asked me questions we're going to take all of those questions and we're going to mamate that so five acquires each give us 10 questions now we got 50 questions we're going to answer all those questions and we're going to spend time going through them and and we're going to and we might even add some additional questions to it who knows like we just might add a few extra questions um and we're going to shape this and we will send this question package this data package out to allir simultaneously and we're going to do that because often s it's important for other buyers to see some of the questions that other buyers are asking now on occasion there are questions in there that do us no good um sometimes an acquirer could be more informed about a business or about the principles of a business than others um somebody might have had a drunk driving issue for example and it was one acquire that found that uh that's not relevant to the transaction you're the seller you got nailed from drunk driving you're not going to be a part of the acquisition going forward they shouldn't care about your driving record it's not relevant to the discussion an acquirer does some research they find this record they may do a background search they ask some questions about it I'm not going to put that in the questionnaire package because I don't want to draw attention to something that is not relevant relevant or jine in any way shape or form and should not have any impact on your deal so I'm going to remove that but for the most part the big list of questions go out to all the acquirers and now they're like okay there are a lot of folks looking at this there are a lot of folks asking a lot of questions we need to sharpen our pencil it's time for the next round let's bid and we continue to ask them to revise your bid forward until um acquires fall out and you know I often times find myself in a position where there might be two right depending on how how we're running the process we might ultimately at the end of the bidding we might sign either a letter of intent or we might sign an exclusivity agreement and allow two or more acquires to do diligence simultaneously now allowing two or more acquires to do diligence simultaneously is more similar to a full controlled auction rather than a modified auction in a modified auction you're typically signing a letter of intent one acquire who has exclusive access to deal materials but we're going to continue this process until we get to the best terms and I always tell every client like from a psychological perspective you absolutely need to be agnostic as to who's going to do this deal and 50% of the time clients will say hey I know I've got a bunch of options but I really like h a they're they have a very similar culture to us um I've known those guys for years I think my company would meld very well with theirs and while that may be all well and good and all of those things true you know at the end of the day we're selling a business here so we're focused on money in terms and that acquirer should be treated just like every other acquir and they should go through the process simultaneously with the others and you shouldn't fall in love you know the second you start falling in love with one particular acquir now you have that disparity of Desire like you only have eyes for that particular acquirer you want want to do a deal and you're willing to make accommodations and that actually comes out in the process so you need to attempt to blind yourself from that look at all acquires equally and let the facts speak from themselves when we get towards the end of the bidding process you know once we start getting towards the end of the bidding process it's very very important for us um to think about how leverage has played out throughout the the acquisition mating d right so we we brought a lot of acquir which gave you optionality right you were the dude with all the chicks after you you were allowed you to really bid up the press in your business and we demonstrated that right we demonstrated to the acquirers that they had a lot of competition and they were going to have to pay to play We concealed information throughout you did a fantastic job on those management meetings you were fun you were playful you were passionate about your business you asked some great questions you didn't lovate you did exactly what you were supposed to do all the acquirers loved you great job you concealed information right you didn't talk about your wants needs desires you were focused on them and you extracted as much information as possible and by doing that you allowed me to really understand how much value these guys are going to be creating by doing the deal which allowed me to push really really really hard when they were Rising their bids somebody comes back with a $50 million bid I was like Hey listen you're creating a lot of value here you know it's going to take you least 60 to get to the next round you know that 50 is just not going to cut it but you helped me do that because you played your cards right and you the right thing in the management P we've remained very credible throughout throughout this process we remained credible and we've done that because we haven't had to really negotiate yet right we have let the process negotiate for us I haven't had to have any direct negotiations with any of those acquires you've done a great job dealing with the management meeting you've been cool and detached you haven't gotten upset you saw some low offers you didn't didn't get frustrated you're like this is how it works I'm going to trust the process and let this happen so right now because we're not doing any direct negotiation all of that negotiation has been on the other side of the table those are those those acquirers competing and when negotiation takes place on the other side of the table amongst themselves we are running an auction but now as we start to get towards the meaning of the minds it's when we sign a letter of intent that's when leverage can abruptly shift from our side of the table to the buy side right the second that we sign a letter of intent we're not binding ourselves to doing a deal with an acquire if the LOI is appropriately structured really what it does is it it it binds us into confidentiality right we can't talk about the deal it binds us into a period of exclusivity and exclusivity means that the acquir will have sole and exclusive access to data finances resources of the company to do their final assessment while they're drafting a purchase agreement prior to the closing and as part of that exclusive agreement that means we have a no shock provision that means we cannot talk to other acquirers right we can't say anything to them and a lot of times um a buyer will want like if another acquire comes to us in an exclusivity period that we actually have to notify them like hey a buyer showed up at our door and wants to talk so we lose a lot of Leverage um when we get into exclusivity because we lose one of the most important aspects of Leverage which is competition because once we sign that Loi those other buyers are gone we tell them hey we just sign we just got into exclusivity with an acquire thanks for playing you didn't make the deal now the ability to enter into exclusivity is powerful for us because they know we're going to enter exclusivity with somebody and we want that to be them so we want them to really put their best work forward and pay a lot of money for this business so they can win exclusivity but at some point one party is going to get it so given the fact that leverage will shift dramatically once we get into exclusivity we have to make sure that we've really thought about all the things that are important to us in this deal and we get them in the weather inent so throughout this whole process of dealing with iterative bids going to management meetings answering questions we've been having conversations over the last few weeks and really looking at all the other letters of intent and every time we've gone through a bid process or an iterative bid round we're making comments on the letter of intent saying hey acquire a you know the lease term should be 5 years and not three and hey acquire B you know we're not willing to sell this this is an excluded asset so we're revising these Lois as we go through this process but now when the rubber meets the road we need to make sure that we're really thinking ahead to the asset purchase agreement or the stock purchase agreement and that definitive agreement is actually The Binding document that we would sign sometime prior to the closing or at the at the closing and then money will change hands and then once Money Changes hands the deal is bound you don't own the business anymore so it's important for somebody like me as well as your legal council to make sure you start to understand what sort of Provisions will be in a definitive purchase agreement as we're going through this negotiation process to get to the letter of intent um there's things like reps and warranties and demn ifications caps and baskets there's a variety of legal aspects that will actually make a difference in your life post closing that we need to make sure that we ask for at the LOI stage and I'll do some subsequent sessions on some of those key points so you could be better prepared for that but for our purposes right now um since I'm focusing on negotiation and these Dynamics it's really important to make sure that we ask for and get everything that we possibly can prior to sending the LOI because at that point we lose l in this particular case let's say that the five bids actually stayed it and we ended up signing an Loi with one of them right um it would be not common that all five would stand to the very end but I want to make this super easy so five stayed in so we're telling four thanks we've decided to move forward with another party thank you for participating we see you on the next one those four go on their way and now we have to make sure that this acquirer closes this transaction and we're going to be in a different phase of negotiation now up until this point we haven't had to do a lot of direct negotiation right we've let the process negotiate for us I've never had to call up and fight about terms I just say Hey listen you do this or you don't if you do this you stay in the process if you don't iy now once we sign the L it's not that easy right like we can't say bye-bye because we can't talk to any other buyers and we're under exclusivity for the next 60 days so we can't threaten to walk away we're already in this now we can walk away if those guys are buig or we decide we don't want to do the deal but it's not a negotiating tactic so we have to think about the psychology of negotiating one stronger exclusivity which is very different because now we're negotiating directly with that one party and inevitably there's going to be um terms that will need to be negotiated and this is where judgment is extremely important this is where the credibility that we've built up through the entire process will B well for us the information that we've gathered the competitive pressure that we've put on and if we've done a great job we've probably put together a deal that's extremely expensive for the buyer and so like it's not unusual for the buyer to be like I'm paying a lot of money for this business so now I sure as how I'm going to make sure I'm protecting in this legal document and if we hav't thought through that at the LOI stage and gotten as much of that as we can in the LOI soon as we sign it the the buyer's going to say hey I'm paying a lot of money so there's going to be a lot on the line for you so we need to make sure that we've talked about escripts right A lot of times acquirers will offer $20 million for a business it might be all cash at the closing and we structure the deal we sign the LOI and then we get into the purchase agreement NE NE iation phase and somebody says yeah we need a $2 million escra that wasn't the L well the LOI was sign on that but that's standard practice and so now we're negotiating escrs right and so we need to make sure that in the LOI we specifically if it's 20 million cash deal like there is no escrow and if there's DRS and warranty Insurance who's paying for that and how is it being split and all those sorts of things and I can really get down go down a rabbit hole on this but there are inevitable things that will pop up that we can't anticipate um let's say that you are a residential services business and although the acquirers did a lot of work UPF front prior to making offers and prior to signing a letter of intent the acquirer whom we chose to walk down the aisle with discovered some things that increase the risk of the business maybe customer concentration and they figured that out of diligence after signing the the LOI and they came back to us in good faith and said hey we have a problem here there's a lot of customer concentration if this big customer leaves um we didn't realize this before we're going to end up leaving a lot of money on the table um and we in good faith want to work with that that buyer um they might propose something like a a special Indemnity hold back they might say well post closing you have to retain this client or client group for a one-year period And if you're a ble to do that then um you'll get the $2 million that I'm putting in this old back back we're just going to hold your money it's your money but we're holding it if we lose these accounts we take this money and we don't have the ability to walk away unless we want to kill the deal which we don't want to kill the deal because we just spent 3 months negotiating an awesome deal but we also don't want them to hold $2 million of our money and make it contingent upon customers that will have no control over post closing and so it's about finding common ground and that's in some way where a lot of the Cooperative aspects of negotiations come into play I mean the acquirer certainly doesn't want to lose those accounts and I think a lot of sellers get really frustrated um and this is where you need to remain cool and detached in a situation like this a seller would typically feel like this is a personal affront to that like they waited to sign the LOI they could have done the research before now we locked it up for them and they're trying to gun for us now it's possible and that does happen but in this particular case let's say that's not the case so they're doing this in good faith this is the point in time for you as a seller to remain calm cool and collected and say okay we've got a problem that we've got to figure out how to solve and typically and not always but typically what will happen is the acquirer will make a proposal and then we'll make a counter proposal they might say 2 million and we say that's way too much but we're willing to do something because we recognize it's a problem and we recognize you're operating in good faith so we're willing to do 500k and so now we've got that Delta between 500k and 2 million and often times this is kind of a standard positional bargaining concession pattern right where we are going back and forth they say 2 million we say 500,000 they say 1.5 million we say 750,000 right and so we've demonstrated to them that we made a $500,000 movement but we're getting much closer to our our walkway point so we're going to lower the concession amount and usually concession amounts as they go forward they are in smaller and smaller increments this is another area where time matters time with regard to deadlines time with regard to investment and now time with regard to acceptance so the initial gut reaction of a seller is like off go pound sand I'm not doing a deal but the reality is you want to do a deal The Price is Right right we do recognize this is an issue so let's try to work through this and we're doing our positional bargaining counter offer counter offer this is important time for sellers to relax and slow things down because you know I think if my BP were sitting here he would say the most important thing that he's ever learned from me is do nothing um often times as negotiators we want to act um you as a seller are going to be under emotional duress you're going to want to act Sometimes the best thing you can do is slow down and if you've got a good acquirer who's investing a lot of money and now they're in diligence and they're spending hundreds of thousands of dollars on lawyers on financial advisors on accountants to go through your company they got HR experts coming in they're spending a lot of money to get this deal done they probably don't want to walk away from it um but they need to be able to save face it's really difficult for corporate guys to go back to their boss and say hey we discovered this we should have found it earlier but we didn't and we tried to work with the seller and the seller is telling us no way you're trying to screw us it's not a good position to be in because of course the boss is far away from the negotiating table he hasn't invested the personal time he doesn't have the relationship with the seller um it's very easy for him to say forget it like if that seller wants to be hard I gu just walk away from this deal so sometimes you just have to accept the offer make your counter proposal they'll make another counter proposal and then you just wait and you sit on it and you relax you fight all your Natural Instincts to get your arms up in the air and fight this and you just relax and sometimes time does heal those wounds sometimes the acquire does moreal work and more times than not they'll come back and say hey I think we can make this work if you're willing to do X we'll just get this done and ideally you'll find yourself in a position that um you ended up getting a better chm than you otherwise would have gotten had you immediately engage them so there's acceptance time and you know I think it's very important for people on the buy side to understand this probably more so than people on the sell side and when you're on the buy side you're often disappointing people because sellers often want more than they should get and that's a fundamental rule here it's very rare for seller just to come in and say you know what my business is maybe it's worth 20 accept 10 that doesn't usually happen and so often times buyers are giving sellers offers if you imagine yourself in a direct negotiation with somebody you're trying to buy his business and you look objectively at the business and you say to yourself okay it's worth 2 million bucks um the question you always have is who makes the offer first is it the seller needs to put an asking price on it um if you the buyer do you make the first offer how do you handle that and you know those particular cases I often say Whoever has the most information um and has the most knowledge about business who's more of a specialist in that particular asset class should go first with an offer because if you listen to a crazy seller who's not particularly sophisticated they're going to start throwing throw some crazy numbers around and you're going to end up our you know look you got a $2 million business he want my asking price is5 million well now you're negotiating off his $5 million asking price so even 2 million which you think is reasonable is going to sound ridiculous to him when I talk about acceptance time it's about you you as the buyer taking control of the process right if you can as a buyer on the sell side I'm always trying to control process I'm negotiating process rules I'm trying to control process when you're a buyer you want to take control of process and you step in you make that unilateral bid or proposal to buy the business and you know let's say that you would be you'd reasonably expect to pay 2 million for it you know you might come in at 1.5 something to not insult him but uh also give yourself plenty of room to negotiate up to that 2 million and why I say acceptance time is in his mind he wants 5 million bucks for that he's not going to accept that overnight right he's going to unilaterally reject your proposal and say hey um I'm not even willing to talk to you when you're serious let's sit down and talk but 1.5 is is ridiculous it might take him a week it might take him a month it might take him six months to realize that he needs do whenever we get bad news whenever we get news that dramatically is dramatically different than our expectations we don't immediately accept it right we have to sit back and process it and it takes time and I feel like sometimes buyers really end up working themselves out of a deal when they don't understand acceptance time and so I know this is a cell-side discussion and this was a little aside for you but it's an important aspect is acceptance time let the other side accept the situation as to where they are let them understand what could potentially happen going forward if they don't see things the way that you do and then sit back and wait the the most important thing that you can always do as a seller is control that process you control the deadlines you control the timeline you have the ability to speed things up but you also have the ability to slow things down and remember exclusivity if you've negotiated the LOI correctly exclusivity does not last in perpetuity so you might have signed up for 60 days of exclusivity the buyer comes to you and says hey I want this $2 million escro or hold back you don't want to do it you can let the shot clock run out right that exclusivity will expire you're spending a lot of money it'll expire in 60 days you can go out and talk to other acquirers you can go back to everyone that you talked to before and say hey it didn't work out with that buyer I'd like to do business with you now you're not putting them in a position of strength right now now you're demonstrating desire to do a deal with them so I don't know that I would suspect that you would get the exact same price in terms as they had offered you before it's possible sometimes if they still really want to do the deal but it's not always the case but just remember acceptance time now that we've talked about the formal sell-side process and the right things to do I want to spend a little bit of time on the wrong things to do one of the biggest mistakes that I see sellers make is negotiating with one buyer and that's wrong for a variety of reasons first off as we know if you've got one buyer there's no competition so the buyer has no reason to act because it's usually loss of version that makes people act so the buyer has no reason to act um you've seeded control of the process to the buyer if you're on negotiating with one buyer the buyer now is negotiating process as well as substance and the buyer is controlling that process so you're seeding leverage to the buyer I think another one that folks often don't think about though is the failure to get price Discovery you know competition clearly pushes up the value of an asset but when you negotiate with one buyer and you consummate a transaction after the deal's done can you really look back and say I did the best for myself you know if you brought in no other buyers knowing that valuation is subjective right it is arrived at at the bargaining table there's no price tag on a business so if you negotiate with only one buyer and then find yourself in a position where you closed a transaction and brought no other acquirers in you never got price Discovery and it's one of the biggest regrets that I hear from people um after having sold a business negotiating with the private Equity Firm that just called him up out of the blue and said we're the best buyer and pay you the most is did I really do the right thing and you know those sellers over time want to somewhat close their ears to the transaction multiples they hear that others are getting because their deal is already done but again if you want to do the best thing for yourself at bare minimum if you don't run a formal process if you ignore everything else that I say bring competition into the mix that's number one another big mistake sellers make is going into this without a plan right if you're going to sell your business you need to spend time up front hire experts figure out what some reasonable expectations are because you know pain really comes from that gap between expectations and reality if you walk into this with expectations that are far above what you're ultimately going to get it will be a painful process for you so formulate a plan before you wait in the market set your reasonable expectations build competition for your business use time and deadlines as leverage far it out information on the other side that helps you understand the disparity of Desire conceal information that potentially oberts negative leverage on you build credibility over time doing what you said you would do and properly giving positive and negative feedback to the other side if you can do these things all else being equal I promise you you will raise the value of your business the biggest mistake that you can make as a seller is negotiating with directly with one buyer when you negotiate directly with one buyer you're effectively seaing the process control of the process to the buyer the buyer is setting the rules the buyer has no reason to act in absence of competition the buyer has no reason to do anything at all so they can drag you out and I think sometimes most importantly what people don't think about is that if you don't run a formal process and bring in competition you'll never really know how much money you left on the table now certainly there are instances where you can negotiate with one buyer get a blockbuster deal and would not have done better elsewhere but I find that happens in the extreme minority of cases remember the value of a business is not there's no price tag on a business it's arrived at the bargaining table value is subjective it's a matter of bringing in a wide diversity of acquirers and having them bid competitively to acquire your [Music] business for my fellow m&a professionals out there today I hope you picked up something to tighten your game and for you business owners you got a little taste of some of the complexities involved in a form sell-side process it's not easy it's not like selling a piece of property or some equipment otherwise I wouldn't have a job but here pelic there's nothing we love doing more and we kill it for our clients we do over a billion dollars in transaction volume per year in fact we did about 700 million transaction volume in the last 60 days we're extremely active across the services space and we'd love to begin having a discussion with you today in order to get you set up and ready for when it's time for you to pull the trigger in fact the majority of our clients come to us years in advance and they value our advice as they scale their business and prepare for an exit reach out to us today I'd love to have a chat with you about your business and particular circumstances and I'll show you exactly how you can reap the rewards of a formal cide process again I'm Paul ganore and thank you for spending time with me today you [Music]