Acquisitions: Is Your Seller Motivated? Part 1: The Buyer’s Perspective

aquisition

I was recently involved in an acquisition transaction that fell apart at the altar. In this case, the seller ultimately did not honour commitments he made at the letter of interest stage. There are only two possible explanations — either he didn’t understand those commitments, or he had a change of heart.

This begs a question — what can you as the buyer of a business do to evaluate the seller’s level of motivation? This is critical because the sooner you know that your seller is motivated, the smoother negotiations will be and the higher the likelihood your deal will actually close.

Ron Aspe, CEO at Lucidea, is a seasoned entrepreneur who has successfully completed several acquisitions. Some of the questions Ron considers when assessing vendor motivation include:

1. How old is the seller? Valuation multiples are on the rise and some business owners are willing to sell only for more than their companies are worth. Generally, the older a vendor is, the more likely he will close at a reasonable price.

2. What is the vendor’s reason for selling? If the business is struggling, there is a better chance of closing. If it is profitable, the vendor can decide to sell later and bank each year’s earnings in the meantime. Similarly, if there is a gap between the valuation and the vendor’s retirement plans, the seller may opt to run the business for a few more years rather than sell to you now.

3. What is the seller’s plan for the future? Does he have a vision of his personal future after the deal? Some people don’t think that far ahead and then change their minds when they realize they don’t have a viable plan.

4. Similarly, an owner operator usually has a deep ‘relationship’ with his business. He may want to ‘break-up’ from time to time, but the tighter the relationship, the more likely he will decide to ‘get back together’. Can your seller handle the break up?

5. How many owners are there? In Ron’s experience, the more shareholders, the more issues and the lower the likelihood of closing.

6. Who is the seller – an owner operator, or a private equity investor? A private equity seller will usually carry their deals through to completion once the term sheet is signed. Not so much with owner operators.

Acquisitions consume precious time and resources. As a buyer, these tips can help you to better assess the odds of closing the deal you are contemplating. Join us next time for the perspectives of a variety of experienced M&A advisors on how to evaluate seller motivation.