You Have an Offer, Now What?

In this episode we discuss how NOT to catch the Cinderella Syndrome when negotiating a LOI or IOI.  I reveal our unique AI tool which will scan your offer document after  you scrub it for the sensitive information, outlining the  vulnerabilities and deficiencies in the offer so you can easily pinpoint what you need to focus on.  Then,  yes, of course, you will receive tips and tactics for negotiating the best possible price and terms for the sale of your business. 

Visit us at:
Bsalesgroup.com,
DesignMySale.com,

MyBizValue.com

Transcript

SPEAKER_00 0:06

Hello and welcome to MA Murders and Accusations: The Good, the Bad, and the Ugly of Selling Your Business. We dig into what you need to know and how not to kill the sell of your business. Now here's our host, Rick J. Krebs, Mergers and Acquisitions Advisor.

SPEAKER_01 0:26

Hello and welcome. This is Rick J. Krebs, the MA Cowboy, coming to you from the mountains of Hebrew City, Utah. MA Murders and Accusations. And today we're talking about murders, how to stop them, how to not kill your deal, ways to handle it, and what to do. And I'm really excited about this topic. It's one that I've dealt with a lot, one that I've thought a lot about. And it is what do you do? What the heck do you do after you receive an LOI? So whether it's a solicited or unsolicited LOI, you're going to want to tune in because these are the things that you're going to want to know and do. So, first of all, let's say that you're a business owner and you get these inquiries all the time from people saying that they have buyers or people that say they want to buy your business, right? Your spam email box is probably half full of these people just driving you crazy. But once in a while, you'll get a letter of intent. You'll get someone who's serious. And first of all, you'll get this letter of intent. I want to say, congratulations, right? You're excited. And it's a little bit like the mother who is driving her baby around the park in the little pram, and she's walking around in a beautiful sunny day. And then the stranger comes up and tells her, Oh, what a beautiful little baby you have. And the mother is flattered. She's like, Oh, well, thank you. And she's just so flattered by what they said. And this is the way it is with buyer. Sometimes you're just flattered by this letter of intent. You know, your business is your baby. You spent a lot of time building it and a lot of effort and blood, sweat, and tears getting it to where it needs to be. And for someone to come along and make an offer on it and say they'd be interested in buying it and buying it is flattering, right? But don't be flattered. If you're flattered and you don't treat this right, you're going to leave money on the table, sometimes hundreds of thousands of dollars. Don't be like the girl who seldom gets asked out, and finally someone asks her out on a date and she's so excited she falls in love with the first guy that comes around and asks her out. Don't do that. Don't let this go to your head. Don't let this offer go to your head. The first thing that you should do when you get a letter of intent is hire a broker, hire a business broker, hire an MA advisor, an investment banker, but you hire someone. Why in the world would you need to hire someone when you have an LOI? This is the reason. You hire someone and let them take that offer and get more offers. Right? The best thing you can do with one offer is to get two offers. And the best thing you can do with two offers is to get three offers. Because once you have two to four offers, then it gets interesting. Then you can go back and you're not like the girl who doesn't get asked out very much, or the guy that doesn't get asked out very much. You've got several suitors. And when you have three or four offers, your posture and the sound of your voice, everything changes when you're dealing with them. When you only have a single suitor, you're at a weak negotiating position. Negotiating starts when you have two to three offers, even four offers. That's when your negotiating starts, and that's when you can push the price up. So hire a broker to go out and find more buyers, go out and find more people to make more offers and let them start to compete against each other. Create a competition amongst them. You're too busy to do it. You're running a business. You get so much on your plate. You don't have time to go do this, but hire a professional to do it. Oftentimes they'll do it for a little bit less in their fee. So you get a break on that, since they're not running a full process, but definitely get a professional to help you and go out and make more money, right? If you've got multiple people, and I'm telling you, they can smell it. They know by the sound of your voice, by the look of your eye and your demeanor, they know if they're the only people making offers. And they can smell it. They smell blood and they're going to go in and they're going to go lower than what you could get. And I see this time and time again where people just give up money because they're flattered with one offer and they don't hire a professional to go out and find more offers or to negotiate. And I'm not talking about an attorney or CPA. They're great seamen, but they're not ship captains. You need a ship captain, you need a broker, business broker, MA, investment banker, somebody that's done this, knows how to negotiate, knows when not to blink, and knows how to guide you through this. Chances are you've never done this before. You've been involved with real estate and other types of negotiations, but this is a high-stakes game. You have one chance to get it right, and you need to get the people around you that'll help you. So don't fall in love with the first guy that asks you out or first girl that asks you out. You want to date a lot, you want to have other people. Next thing is be courteous with the time deadline. So when they send it over, typically it will have a clause in there that says this letter of intent is this offer is good until such and such a date. And this is the game that we play. So they're pushing the gas and we're pushing the break. We want to go slow. We want to take our time. We want to think about this. We want to get more offers, get more people in there, right? But they're wanting to push it ahead, they want to push it ahead. They want to get the ring on the finger, take you off the market. So it's a game that we play, and we have to be conscientious of them and their feelings. And also, you know, the first person that makes an offer may be the one that you end up going with. So you don't want to offend them, but you want to cautiously do the dance and play the game and be courteous about their time, but know the timelines can and often are extended as you're working towards closing. They're going to want to know that you're working towards it, right? They don't like you to take their offer and then they go out. And one common tactic with real estate agents as I don't mean to dog on real estate agents, but one common tactic is they'll take an offer and then they'll go shop that offer with other buyers and say, can you beat it? And this isn't what I'm talking about. I'm talking about not telling the other buyers what the offer is and letting them come and bid for it. I don't feel like it's morally right or fair to shop the offer price, but it is fair to get other suitors and to get other offers in. So be courteous with their time and they need to know that you're working on it and you're working towards it. And it's a big decision for you. And you need to talk to your CPA and you need to run the numbers on taxes and you need to talk to an attorney. And these things take time, usually not days, usually weeks. And so it can be extended as long as you're working towards signing. One of the mistakes I see is if you get people in that are hard driving, that are hard negotiators, they're given too much pushback up front, then we're letting a well-meaning attorney drive the ship or well-meaning CPA drive the ship, the ship runs into a rock and your deals don't get done. So these tactics, these hardball tactics with businesses, to a certain extent work, but mostly and generally they do not work. This is a marriage, it's not a divorce, it can't be negotiated like a divorce. So once you get your LOI, first thing you're gonna want to do is read through it with your broker. You're gonna want to look at it, you're gonna want to take notes, you're gonna want to understand it. Two parts. There's the parts of the LOI that are binding, and there's parts that are non-binding. You're gonna want to understand that. They're gonna want to take it to your CPA and look at the tax ramifications. You're gonna want to understand the structure. And so get clarification on all of these items. And if you're asking questions back to the buyers, that can buy you more time. These are some of the tactics which we use to get more time is go back and ask them questions, get clarification about any sticky points. And if there's hair on the deal, if there are sticky points or potential problems, you want to negotiate those up front when you're doing the LOI. So you're gonna want to push the brake. Buyers are pushing the gas, but take your time. Side powered negotiation tactics don't work. It's like you can't make someone love you, they have to want it. And so the key is making them want it. And I have another podcast about three ways to handle things escalate and give in, play cool. So we're gonna talk about those in the other podcast that I have where it talks about the different types of buyers and how to answer those questions. But again, remember this is tea and crumpets with the cat and the mouse, and we are the mouse and we don't want to get eaten alive. So different negotiation tactics, which I've used, and and not all of these are used on everyone, but these are some ways to overcome the humps or overcome the differences. So when you get your LOI, one of the big questions you want to ask is how far apart are we? One, and is this worth? Are we too far apart? If you're too far apart, you can just go back and say, you know what, we're just too far apart, it's not gonna work. But one of the tactics is if there's not a lot of space between you is to meet in the middle. This is a give and a take. The second tactic you can use is every time they ask for something, then they have to give something and say, you know what, this is how it works. If you ask for something, you have to give something up to make it fair. Learn how to read your buyers. And in my other podcast where I talk about the buyer types, learn how to read them and you'll answer their questions and objectives based on their type. You get most of what you want, but you seldom get all of what you want. There are certain things that you want to play hardball with, certain things that really matter, and your broker will help you. They'll sit down and prioritize, make a prioritized list of the things that are most important to you. And oftentimes the tactic is you'll give up a B or a C item after you prioritize them to get an A item, right? So you're gonna want to know that you don't get every single thing you want, but you're gonna get the main things you want. And you're in the driver's seat here. Don't feel like you have to be compelled to do things you don't want to do. You're in the driver's seat, you make the decisions. Your advisor will help you with that. When all else fails in negotiation, one of the things that I do is I get everyone on the phone or in a room and we discuss ways to resolve issues. Sometimes you have to do that if all things have fallen out and you just can't get it done. Well, let's get everybody on the phone and let's discuss it, right? Because of what it's person to person, people will often give up a little more to make a deal happen. Sometimes on this phone call, you have to leave out some of the ancillary members of the team and just speak man to man or woman to woman. I'm seeing now as interest rates have doubled, that LOIs are taking longer now than they were before to negotiate and to get, I want to say, under contract to get signed. So they are taking some time, and I'm seeing that the negotiation is harder, actually, than it was before, where there's more of a gap between what the buyer's expectation is and the seller's, and so it takes more time to bridge that gap. And it's not all about money. That's the other thing. Sometimes you think, well, whoever pays me the highest price, but you know what? It's about a partnership, it's about a marriage, it's about someone that you like because you're gonna have to work with them. They're gonna be working with your baby and your employees. Many of your employees are like family. You spend more time with them than you do your spouse. And so you're gonna want a good partner. And so it's not always about the highest dollar amount, not always about the money. Money is important, but that's not every consideration. Be considerate of their wants and their needs and their expectations, but take your time and take the time that you need. One tactic I see is that buyers know that there will be a sticky point, and they intentionally come in with a high offer and they wear you down through due diligence. They leave this sticking point out, wait until you're vulnerable, till you're worn down at the very end, and your chances of giving in are higher, and then they bring this up. It's a guerrilla tactic. I don't like it, but sometimes I see that. So anything that's a big issue, make sure that's not the way you handle it. I don't like to cross my fingers and hold my breaths. Hope for the best. It's just not what you want to do. I've beat this dead horse a lot, but working capital, make sure that you know what working capital is, at least how it'll be calculated. Agree on some type of calculation at the LOI. And if you can't get it done at the LOI in the beginning of due diligence, attack that first. We just close the transaction. We're dealing with working capital. Oftentimes you'll have cash-based books and you have to shift them over to accrual, and sometimes you won't even know what those numbers are until you're close to closing. So working capital is imperative that you negotiate as well as the asset allocation, form 8594, and you're gonna allocate those assets so that you can allocate, negotiate the allocation to be to your benefit for taxes and save some money. Some of the things that you won't see in LOIs typically are earnest money. And I have people ask me all the time, they're like, Why isn't there earnest money? And the reason is that buyers will have a lot of skin in the game. They're gonna hire advisors typically, depending on the deal size they'll spend anywhere from $50,000 to $250,000 to go through due diligence, to go through all of the things which they need to do. So that's considered their earnest money. It's non-refundable because they're hiring their advisory team. Once in a while, I'll see earnest money if extensions are asked for and granted. And so I am okay with incremental earnest money. Non-refundable earnest money is very seldom, if ever, part of an LOI. So, how is an LOI different than a real estate deal? Well, we talked about it already. Earnest money. If you're used to doing real estate deals, there will be some things that will be the same, but there's some very important things that are not the same. And some of the things that are not done in a business acquisition deal, like earnest money, backout clauses. We don't usually see those, breakup clauses, we call them. And contracts are negotiated in backwards order. With commercial real estate transactions, you negotiate the contract up front. Well, with business deals, you negotiate the terms up front, but the contract isn't actually negotiated until the very end. So it's actually backwards from what you'd have on a normal real estate deal. Also, either party can back out at any time. It's an engagement, not a marriage. So if you find something you don't like, you can certainly back out. But you were both committed to trying to get a deal done. But you can back out or they can back out without any cost to you. And that's something that's different than real estate. And it's also a longer due diligence period. Due diligence is much more comprehensive and longer period of time with real estate is typically just an inspection period, right? A couple of weeks, sometimes a little longer, depending on the size of the real estate, but not the same with businesses. There are so many moving parts in a business that it takes 30 to 60 days just to do due diligence. Buyers are worried that the sellers will back out. And sellers are worried that the buyers are going to back out. So you're going to want to make sure that they're committed. And all of the sales that I've ever done, there's a point in time during due diligence where the inflection point is, and from a buyer standpoint, it goes from, are we going to do this sale too? How do we get this done? And you'll sense that and you'll sense it in their questions. And when they get to how do we get this done, there's a high level of trust and they feel like they like you. And that's when they start with the legal contract. Unlike real estate, their legal contracts all negotiated up front. This one's at the end after they've reached that inflection point of how are we going to get this done. Exclusivity and confidentiality, we talked about those. Those are two important parts of the LOI. The non-binding parts are that you can back out at any time. So, anyway, hopefully these tips have helped you today. I've just spilled every bit of knowledge that I have about LOIs. And don't get too excited. When you get one, get yourself a really good broker, really good MA person to go find another one. Best thing you can do when you have one is go find a second, third one, and then start letting them start get into a frenzy. And they do, and they start that price just goes up and up, and it's good for you, and it's better for you. And even when you accept one and the other one that missed out, they're a little sore that they missed out. But the one that got accepted knows that if they mess up a little bit or they start messing with you, you're going to go with number two, right? You're going to go with number two or number three suitor. So it's a much better transaction. It's much better for you as a seller if you can have multiple LOIs. Thank you for tuning in today, MA Murders and Accusations, the good, the bad, and the ugly of selling your business and how not to kill the sale of your business. This is Rick J. Krebs, the MA Cowboy, wishing you a great day.

SPEAKER_00 16:42

Thank you. Thank you for attending our podcast. We invite you to join us for future episodes of MA Murders and Accusations, the good, the bad, and the ugly of selling your business. You can also visit us at www.bsalesgroup.com or email Rick directly at rick at bsalesgroup.com.