Last time we discussed how buyers of businesses assess vendor motivation. I also checked in with several experienced merger and acquisition advisors for their tips and experiences on how to assess a seller’s level of motivation.
While there is no formula, Marco Tomassetti, a Partner in KPMG’s Deal Advisory practice, and David Lam, a Partner with Deloitte’s Corporate Finance team, agree that the following are strong signs of commitment to the sales process:
- Has the seller engaged an advisor and/or other people from his company? “If you are just dealing with the owner and no one else is ever at the table in terms of an advisor, or the seller’s key people, you would question how committed the seller is to the process,” says Marco. “I have come across a number of entrepreneurs (typically smaller businesses) where the owner starts a secret conversation simply to ‘test the waters’.”
- David goes on to point out that payment of a non-refundable retainer to an advisor is a strong sign of commitment. “Merger and acquisition advisors must charge a non-refundable retainer,” says David. “Such retainers typically range from $15-25k per month for up to six months, so they represent $75-125k in total financial commitment by the seller. This is not how advisors make their money — and they are credited against success fees when a transaction closes – but they are a tangible sign that the seller is motivated.” Marco agrees, “I really question how committed a seller is if they are not willing to ‘invest’ into the process. I have had a rule of thumb for at least 15 years that I will not act for someone who is not willing to pay some amount of work fee.”
- Is the seller prepared? If so, he has planned for a transition and is likely a motivated seller. Examples of such preparation can include the negotiation of management contracts with key employees or completion of a tax-driven re-organization of the company.
- Is the vendor talking to multiple parties, rather than negotiating with a single buyer? In David’s experience, if a seller is only talking to one party, “he might have one foot on first and be trying to steal second” rather than really trying to sell his business.
- Is the seller responsive? Is he providing the information you need to complete your due diligence? Does he have a sense of urgency? If not, advises Marco, he may not be committed to the sales process.
Peter Day of Peter Day & Associates, believes that buyers rarely devote sufficient attention to the critical question of vendor motivation, which Peter believes to be one of the most important factors driving deal timing and pricing. Many buyers are satisfied to know that succession or retirement is the primary reason for selling. While this may be true, the sale may not be as time sensitive or compelling as the buyer assumes. With many business owners still active into their 70’s or even 80’s, age is no longer a defining factor.
According to Peter, the number one factor in assessing vendor motivation is deal experience and asking the right questions. In addition to the points already noted, buyers should ask the following questions:
- Are there any internal or external factors driving deal timing for the vendor? The more important deal timing is to the vendor, the more likely that he is committed to the process.
- Has the vendor attempted to sell the business before? Often business owners have made one or more previous attempts at selling the business. This is a red flag indicating that the owner was either not sufficiently motivated to sell or that he was unprepared. What has changed that will lead to a sale this time around?
- Has the vendor been involved in a completed purchase or sale before? Vendors who are familiar with the deal process will be more likely to have realistic expectations.
- Does the vendor understand the deal process and typical deal structure? For example, does the vendor know what assets are typically included in or excluded from the deal price, the purpose and basis of the working capital peg and how it impacts the deal price post closing? A lack of understanding of these and other fundamental deal terms is a sign that the vendor is not ready for a sale and that he could even frustrate the process later on.
- Has the vendor obtained a valuation of the business from a professional business valuator? A business valuation will indicate that the vendor has an informed view of the market value of his business. In many cases, vendors determine the value of their businesses from reported transactions, hearsay and other sources that may not be relevant to their businesses. If the vendor is aware that there is a large gap between his expectations and the market, he is less likely to expose his business for sale unless there are other motivating factors.
Ultimately there are two types of sellers – those who are motivated for their own reasons to sell at the highest price and best terms that can be obtained in the market, and those who will only sell if the price and terms meet their needs. The challenge for you as a buyer is to figure out which type you are dealing with.
The time and effort required to negotiate, structure and complete due diligence on an acquisition target represent a significant investment of time, effort and other resources. The acquisition process can also distract you from the day to day operations of your core business. As a buyer, these tips can help you to better assess the odds of getting your deal across the finish line.