Many years ago, Sun Tzu, one of the greatest and most quoted military strategists of all time, said that one of the keys to winning any war is to “know your enemy.” In the context of a business sale, this nugget of wisdom applies with equal force: “know your Buyer.”
Let me be more specific. If you’re in the process right now of negotiating the sale of your business with a potential Buyer, don’t you think you’d be in a far stronger negotiating position if you knew what the Buyer really wants, what the Buyer is most concerned with, and what the “deal killer” issues are for the Buyer? By tuning in to the Buyer’s needs, you as the Seller can both increase the likelihood that a deal will close and maximize the payout from that sale.
As a lawyer who has represented sellers in many dozens of business sales, I’ve seen this play out many times in real life. By thinking like the Buyer, understanding that the sale process is a competitive process, and preparing for the sale process accordingly, I can tell you from lots of first-hand experience that you’ll be far better positioned to close a successful sale than you would be otherwise.
So let me illustrate this by taking a quick look at each of the three main phases of a sale transaction:
1. Stage 1 – Term Sheet Stage. You should understand two things about the Buyer’s mindset this early part of the transaction: the first is that the Buyer’s excitement and enthusiasm for the deal are at their high point; and the second is that the Buyer is being driven by one overarching goal – to make money.
So how should that understanding guide your actions during this early stage? Here are a few suggestions:
2. Stage 2 – Due Diligence Stage. The Buyer’s mindset at this stage can be summarized this way: “I deserve to see all the documentation and information about the business that I want to see. If the Seller is reluctant to provide what I ask for, that will be a red flag and I will react by assuming the worst. I will assume, for valuation purposes, that the Seller’s business is “clean,” so blemishes discovered in the diligence process will drive down the purchase price I’m willing to pay.” So knowing that, here’s some advice that should inform your actions during this due diligence stage:
3. Stage 3 – Contract Negotiation and Closing Stage. In this final stage of the sale process, fatigue is setting in, costs are continuing to rise, everyone is feeling pressure to close the deal, and tempers may be flaring.
On top of all that, the Buyer is likely thinking some or all of the following thoughts: “I’m planning to pay a lot of money for the Seller’s business, and I do not want to inherit a mess. I’ll be far less willing to compromise on key deal points if I’m worried that the Seller is trying to stick me with a problem or liability that will cost me a lot of money after closing. On the other hand, if I feel I can trust the Seller and the Seller has been honest, candid, and organized up to this point, I will be more willing to make concessions in the name of getting the deal closed quickly.” Armed with that insight, here are a couple of final pieces of advice:
So now that you have a better understanding of your Buyer’s mindset at each stage of the sale transaction, what can you do in the next week to position your company for a more lucrative, less time consuming, and ultimately more successful sale? Start by circling up with your legal and business advisors and mapping out a plan that takes into account what you’ve learned above about how your Buyer is thinking.
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