You’re at the 11th hour of an M&A deal. The due diligence is finished, the purchase price has been agreed to and you’re about to close. Suddenly, the seller contacts you with a seemingly insignificant excuse to scuttle the deal. What went wrong?
In an instant, months of your time and thousands of dollars have been wasted on a broken deal, a frustrated buyer and a blow to your professional reputation.
While some deal issues are out of your control, there can be several personal reasons an owner may suddenly become reluctant to sell a company. In many cases, their reluctance will fall into one of the following three categories:
Purchase Price Uncertainty
When it comes to the purchase price, higher is usually better in the eyes of the seller. But when is the purchase price high enough? Many entrepreneurs enjoy the financial benefits of owning a private company over and above their annual compensation—such as the use of the corporate credit card and other corporate assets. They also get to share in the company’s annual profits as a shareholder.
All of these financial benefits may end when they sell their company, which means they’ll have to rely on the net sale proceeds they receive to fund their lifestyle and retirement. But will this be enough?
In our experience, most sellers have not adequately considered this issue. Nor have they considered whether there will be enough left over to provide a financial legacy for their families or fund any potential charitable ambitions. This fear of the financial unknown can make retaining the company the only perceived option for the seller—even with an attractive offer on the table.
One way to reduce this uncertainty is with the use of a detailed personal financial plan that considers the seller’s post-sale lifestyle. A financial plan can provide the seller with a degree of confidence that the net sales proceeds they’ll receive will be sufficient for their needs.
Influence of Other Stakeholders
You were hired by the seller and have been dealing with them throughout the sales process. Now you’re trying to persuade them that this is the right offer to accept. But is the business owner the only stakeholder at the table? What about their spouse? Other family members? Their management team?
Any of these behind-the-scenes stakeholders may hold influence over the seller and be able to persuade them to refuse a purchase offer. Maybe they’re motivated by a perceived threat to their employment or their professional reputation in the community. Ironically, some stakeholders may be doing themselves a disservice by scuttling a deal if, in the end, it’s in their financial best interest for the deal to close.
Identifying and engaging with these potential stakeholders in the background is a prudent first step to mitigating their influence on the seller and the sale process. An offer to review the personal financial benefits and opportunities available to these stakeholders may also help alleviate their concerns, and increase your chances of closing the deal.
What Am I Going to Do Next?
This issue of “what’s next” can be the elephant in the room that the seller doesn’t want to consider or discuss. In many small to medium-sized businesses, the company and the seller are one and the same. The entrepreneur may have worked most of their career building the company, ultimately making it an attractive acquisition target. But once it’s been sold, what will they do? Play golf five days a week? Babysit their grandchildren? Not likely. Most entrepreneurs have a unique DNA and thrive on the risks and rewards of operating a business. While age and health concerns can make selling all or part of the business a prudent financial move, they still want to feel engaged.
There are many ways for an entrepreneur to continue to stay professionally active without the risks and time commitment of ownership. Angel investing, mentorships and boards/directorships are just a few post-sale career options available for sellers to stay in the game and continue to build their wealth.
The key to reducing seller reluctance starts with realizing business owners have their own personal concerns that need to be addressed. A review of these concerns, either by your deal team or in collaboration with a trusted independent adviser, can lead to a plan that will meet the seller’s needs and increase the likelihood of closing your mid-market M&A deal.
Jason Kinnear, CPA, CBV, is the family office services manager with T.E. Wealth in Toronto, Ontario. Jason specializes in assisting entrepreneurs and their M&A advisers with pre- and post-sale succession planning.