Top Seller Misperceptions
Don't turn a good deal sour
- By Martin Stein, Steve Hall
- Jan 01, 2012
As the public markets gyrate and the mergers and acquisition market
becomes more attractive, it’s worth noting some common
misconceptions of sellers in private equity deals that might railroad
Buyers, particularly those in private equity firms, often burst onto the
scene fresh off their Ivy League MBAs or consultant gigs at top-tier investment
banks, with roots in bean counting, finance and business development.
Buyers convince themselves they have an edge over sellers (and sellers
Don’t let them intimidate you. Most buyers have rarely actually managed
a business, managed people or been responsible for the P&L. In fact, most
buyers are looking at an industry on a part-time basis with substantially less
experience than a seller, who will often have decades of management and sector
expertise. Give yourself a giant pep talk before meeting with buyers, and
acknowledge and appreciate the background they bring to the table, but don’t
underestimate the experience you’ve earned in the trenches.
You’ll Take the Money and Run
Sellers, particularly the founders and owners of a business, care deeply about
the future of the company. You’ve raised and nurtured your business from
conception, watched it grow, and are not about to give it away to just anybody.
As such, owners will favor buyers who are actively engaged and plan to
treat the employees and customers well versus buyers who do not appear
to have the employees’ or customers’ best interest at heart. You care intimately
about what happens to the business you’ve nurtured and may even
want to pop in from time to time. Work closely with PE firms that understand
the value of reputation, and together you’ll have a better chance for
Although sellers care about the future of the business, you don’t care so
much that you will dramatically reduce the price for a “nice” or “well-intentioned”
buyer. First-time buyers—usually individuals—mistakenly believe
that a likeable personality and flash of a friendly smile is the ticket to getting
you the seller to accept a discounted price. In addition, you would not forego a
high multiple for the business—greater than five times—even if that purchase
price meant the business would face financial hardships in the future. It’s still
a business and mostly about valuation.
Don’t let them trade your star player (and it may even be you). Small businesses
and even large businesses without strong operating systems are highly
dependent upon the key managers within the organization. If you are a seller
who also serves as the manager or the president/CEO, you represent an enormous
risk for the business going forward, a risk that should not be underestimated
by buyers. And this is doubly important if your sale includes an
earnout provision based on the company’s future performance.
Good Managers are a Dime a Dozen
While there are tens of thousands of managers in the United States, managers
with the right experience within a given industry—and who are a good fit with
the company’s culture—are challenging to find. While finding the right talent
can take three to 12 months, a bad hire can take 18 to 36 months to correct.
Be available to provide guidance when needed in the hiring process. Ultimately,
the wrong manager in a transaction can be the one bad apple that
spoils the bunch.
Every industry has its particular highlights, and every business will have its
own quirks. Sellers often believe they can easily transfer their vast knowledge
of the industry and the business to the buyers after a limited due-diligence
period. Education takes time, and experience is earned the hard way. You can’t
expect buyers to cram and then breeze through the final exam.
Businesses that undergo an acquisition or an investment by a private equity
firm are still held accountable for achieving targeted financial results. As
a seller, be sure the business has established budgets, sales goals, productivity
requirements, and other operating expectations to avoid substantial cultural
change post-acquisition. The good news: managers and employees who are
not accustomed to a more structured environment will adapt well in a performance-
Numbers Don’t Tell the Whole Story
Buyers are predisposed to spending a lot of time with the financials of a business
and less time evaluating the actual operating systems or meeting with
employees (sellers also share the blame). While the numbers certainly provide
a good overview of the cost structure of your business, they present only a
partial view of the organization. Encourage your buyer to give equal consideration
to the people, customers, brand and other “softer” elements of the
business before you pitch the entire package.
Resist the impulse of what feels like a good deal and do your homework to
avoid seller’s remorse. Far too often, sellers will connect with the first company
to offer a reasonable deal and accept too low of a price for it, giving buyers
an advantage. Frequently, there are at least five to six companies with a similar
business model in the industry.
Larger industries that are fragmented have even more peers. Patient sellers
who know they are in an attractive industry will investigate multiple buyers
and locate the most well-run, highest-performing leaders that are at the top of
the game. Emphasize discipline over gut feel.
Sellers often struggle to interact effectively with buyers due to education
and experience gaps noted above. As a result, sellers can become distrustful
of buyers, especially during the due-diligence process when they rigorously
examine every line item and scrutinize your business practices. It is also
not surprising to find minor differences between what was presented early
in the process and what is uncovered during due diligence or offered in
the final term sheet. These gaps, if addressed properly, should not result in
This article originally appeared in the January 2012 issue of Security Today.