Uncooperative Sellers: When to Walk Away
How Do You Know?
If you’re a business broker – or want to become one – you have to think like a buyer. A buyer needs information and lots of it; really ALL of it. You need to assemble this information in a well-organized, thorough, concise package that is perceived by the potential buyer as professional, accurate and complete. We refer to this package as the Offering Memorandum.
Ideally, the Offering Memorandum that you develop paints such a complete picture of the business you’re representing that, if a buyer is interested, the only issues that must be addressed are verification of the data provided therein and the buyer’s satisfaction that he or she can work with whatever aspect of the existing management team that will stay on with the business after the acquisition is completed. Both of these issues would be addressed – and questions answered – during the buyer’s due diligence period.
But in order to present a complete picture to the buyer, you have to have the complete picture yourself. This will happen only of the seller is cooperative.
Broker Due Diligence?
Taking a listing for a business of which you are not reasonably confident that you have all the pertinent data can turn out to be troublesome in the best of circumstances and a disaster in the worst. You can be sure that any buyer is going to ask for certain easily identifiable data and you can also be sure that if such information is missing, incomplete or incorrect, the buyer will find out during due diligence – to your detriment and that of the chances of making the sale.
This would seem to suggest that you, as the broker, would have to perform an in-depth due diligence yourself to make sure that you have all of the data and that the date you have is correct. But, obviously, we don’t have the time to do this and it shouldn’t be our job in any event. If your client, the seller, truly wants to sell their business, his or her reaction to your conversation about the need for the appropriate information, plus the list that you give them of data points and documents that are needed, will go a long way towards indicating whether they will be cooperative or not. Pay attention to that reaction! If it is anything but complete willingness to assist, red flags should be flying.
Stonewalling During The Due Diligence
But seller cooperation isn’t limited to the preliminary dance of deciding whether to take the listing. Buyers are very demanding – as you or your client would also be if you were considering buying a business – and they will ask dozens or even hundreds of questions. They’ll want to see copies of contracts, bank statements, vendor and employment agreements, time sheets and countless other documents that will help them decide if the business you’re representing fits their acquisition criteria. As things gets closer to closing, they’ll want to interview the seller’s key managers and major vendors.
Some of these questions and requests for documentation will probably be viewed by the seller as immaterial or needless or redundant. It doesn’t matter. If a buyer is requesting them, in is material to that buyer. After all, at this point he or she is seriously considering handing over a bunch of their hard earned – and borrowed – money for a business the prospects for which the buyer can only surmise based on the information provided by the seller – but really by you as the seller’s broker.
One of your upfront responsibilities is to prepare your client for this thorough examination of the business. Assuming you’ve done so, if your client begins to balk at answering questions or providing the information the buyer requests, the buyer will likely walk and you can be pretty sure that you’re in a no-win situation because it’s unlikely that your client will be any more forthcoming with the next buyer and you can be sure that the next buyer will want the same info.
What’s the Solution?
The solution? Well, there really isn’t any. You may have come to the point when you need to stop the bleeding – of time and money.
As the saying goes, when you find yourself in a hole, the first thing to do is stop digging. No matter how much time you have invested or how much marketing money has been spent or how big a commission a hoped-for “sale” might generate, if the chances of actually realizing that sale become slim to none, you need to be honest with yourself and your staff. You may need to walk away.
That said, there are a couple of ways to mitigate the damage.
First, charge for your valuation. We never accept an engagement to sell a business without doing a valuation. And we never do a valuation without being paid. We almost always do the valuations in-house but for overly complex international businesses – multiple currencies, different regulatory regimes, dicey compliance or environmental issues – we’ll hire a firm that specializes in the valuation of such businesses.
Some of our brokers have charged as little as $1,000 to value small, “mom and pop” businesses. At the other extreme, a valuation of a complex Middle Market business done by a specialist could run to $25,000 or even $50,000.
Another way to mitigate the damage from walking away is to charge a retainer when taking the listing. In my experience, retainers are uncommon in the Main Street Market and even in the lower Middle Market, though they are not unheard of there. But once you get into the middle Middle Market, retainers are more common. The parties – the business owners and the broker/advisor – know that significant time and money will be spent on the marketing of the business, the vetting of the buyers, the negotiation of the terms of the deal, the guidance of the due diligence and the myriad other aspects that selling a business requires. Reasonable sellers will value a professional broker’s time and knowledge, and not expect the broker to pick it all up. If a seller is making a half million bucks or more and won’t write a check for $20,000 or so, that seller might not be sufficiently appreciative of the work you do.
The Bottom Line
Some clients simply cost too much – in time, money and aggravation – to get in bed with. But even after you’ve jumped in, if you see that the client is going to be difficult, uncooperative or even cause a potential deal to crash on the shores of stupidity, you’ve got to know when to walk away.
Become a Business Broker
If you’re interested in becoming a business broker – in valuing businesses or any other aspect of advising the owners of businesses on an exit strategy or sale – our upcoming course, The “How To” of Becoming a Business Broker describes teaches what we do and how we do it. I’d be happy to send the FREE syllabus to you. Just let me know where to send it.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday with another post on when to walk away. In the meantime, I hope you have a profitable week!
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The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI). Hecan be reached at joe@WorldwideBusinessBlog.com