2 Types of business sellers: Greedy & Desperate
This is a short writing for newer business buyers as opposed to the old veterans of the deal trail. After working M&A in the Internet service sector for over 20 years I have learned to respect the differences between all of the types of sellers that are out there. This writing is about two of the extremes … the proud seller and the desperate seller.
What I have found is …the total price most buyers pay for a company owned by the proud seller is more predictable than the total price most buyers will eventually pay for a company owned by the desperate seller. Let me explain.
Who are they?
- They are so proud of their profitable and growing company they cannot stop talking about it.
- Every time I ask for a specific due diligence document, the seller provides it quickly and sometimes includes a verbal presentation. The document is thorough and many times provides more information than what I asked for.
- They try to grab every dollar in every aspect of the divestiture transaction … as they have done with their vendors and customers for years … (There is nothing wrong with that … it’s the reason their company is so profitable.)
- The proud seller has avoided lawsuits until this point and certainly doesn’t want to deal with a lawsuit post closing … so a clean company divestiture is usually the result.
- These are the type of sellers that business buyers tend to build long term relationships with post closing.
- The best employees typically want to stay with the company post closing.
- The largest customers of the company are happy and have been adding business to their accounts in the trailing quarters and years.
- The buyer is likely to learn better ways to run a business in this industry.
- This seller is usually running a flat or declining company. This is sometimes slightly disguised by a single profitable division, one very large customer using multiple accounts and names, inaccurate financials or an unrelated business tucked into the company which the seller wants to keep post closing.
- These sellers have been experiencing the daily stresses of the business downturn for many quarters if not years. Some sellers will be at their personal worst as far as ethical business practices.
- When I ask this seller for specific due diligence information, it takes too long to generate and is usually incomplete. What follows are the reasons that specific information cannot be provided.
- They realize most of the stakeholders in their company will be losers in the inevitable transaction(s). They also realize the only winners will be the buyers who acquire the pieces … and sometimes they divert their resentment towards them.
- Some inexperienced buyers, especially those responsible for investing other people’s money, get a little too excited to be investigating and bidding on a distressed company … they are almost begging to complete a deal. Desperate sellers are hungry for this type of inexperienced buyer and will exploit this individual.
- The seller’s desperation (and possible fraudulent behavior) will reach its peak before an actual bankruptcy … the last ditch effort to save the company and/or raise cash to divert to the original investor group (or just themselves). It is the buyer’s responsibility to detect that a bankruptcy (or pre-bankruptcy implosion) is right around the corner. If the financial statements are not accurate, the imminent business implosion might not be obvious to the inexperienced buyer.
- When the deal is completed (and migrated) … buyers might end up with just the slow paying & low margin customers, the least productive employees, angry vendors, an unwarranted bad reputation, lingering lenders, looming law suits, and less than impressed investors.
Moral of the story.
A buyer might be better off befriending the proud seller and acquiring their company, even at a premium, because accurately quantifying the total risk & eventual real return is extremely difficult with distressed business acquisitions.
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FYI, I send out a “Weekly Internet M&A Deal List”. This list contains between 30-40 deals. Each week it is sent out to 1,000s of Internet executives and financial buyers around the world. If you would like to see the latest copy, message me. If you would like to be added to the auto weekly version, you can either sign up on my web site or message me and I will add you.