You put the phone down, close your eyes and attempt to process what you’ve just heard. Your stomach turns and a mixture of disappointment and pure rage rises up through your body. You open your eyes and glance at your note pad.
The deal you thought you were getting has gone and in its place is a new, less attractive deal, one you probably wouldn’t have spent months pursuing had it been offered initially. The purchaser is blaming the change of terms on the outcome of the due diligence process. They won’t share the due diligence report with you, so you don’t know which ‘outcome’ is causing this change and you suspect they are just playing silly buggers.
This situation is all too familiar in transactions and there are two primary causes; a deliberate negotiating tactic by the purchaser or a misrepresentation of the headline numbers at the start of negotiations. If you find yourself in this position, your best bet is to keep asking questions to determine what’s actually going on, then make your decision. If you’re reading this and you haven’t started talking to anyone about selling your business (smart move if you’re unprepared), then read on, as there’s a simple way to avoid the above scenario.How it happens
When you start discussing the sale of your business with a third party, initial conversations always seem innocent enough and the early exchanges of information are informal and usually verbal. It’s understandable that you might quote approximate headline numbers at this stage. Trouble is, we all have this unfortunate habit of subconsciously using heuristics; short cuts in the brain that help us move through complex situations quickly. When it comes to your headline numbers, it’s very easy for all involved to anchor your business to those initial (approximate) numbers.
Trouble is, it doesn’t matter how you couched these numbers when you provided them, they go on their own little journey. The purchaser uses them to discuss the deal internally (ie Project Touchdown = £110m AUM/AUI, £1.5m revenues, 3 advisers, 7 additional staff, £350k EBITDA) and to determine their level of interest, the amount they might pay and the structure of the transaction. These numbers become the underlying narrative to the deal. They are used to create the non-binding offer and the heads of terms, neither of which are legally binding other than exclusivity in the heads. Due diligence is when all the approximation creases get ironed out, often by different professionals, previously unconnected to the transaction. And that’s when the unintended consequences become clearHow to avoid it
So, awareness is great but a solution is even better. Here’s a few tips to help you avoid this situation: -
- Choose your time to start the process of selling your business. Ignore the noise, the email spam, the press. Work out what you need, sense test it and time your own exit. There are always buyers willing to pay a fair price for quality.
- Prepare your data. Now I know from bitter experience how those 3 little words, can amount to an enormous project, but there are some very simple things you can easily do: -a) Prepare 3 years of numbers.b) Reconcile any difference between data coming from various sources (accounts, back office system or platform). It’s best if everything matches, but it’s also acceptable if you have identified the discrepancies and can explain how and why they occurc) Understand the adjustments your accountant makes at year end and how that’s altered the numbers. Those conversations you have once a year, where between you, you whittle the CT bill down by £5k, they have consequences down the line in terms of explaining adjustments made by the accountant to facilitate a lower tax bill.
- Anticipate and prepare all the numbers you are likely to need for the entire transaction and when you quote headline numbers, know that you are able to quote all the other numbers and that you will be able to avoid inconsistencies and the unfortunate consequences later on.
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