Buyers and sellers seemed to have swapped scripts.
When the economy was growing, it was the seller who wanted to focus on the last year and use trends to project future performance. Today, the tables are turned and the buyer is more likely to point to the last 12 months and to expect a “haircut” on price. They may also mention the economic uncertainty and use that to lower their offering price.
And for all sorts of companies, that means there’s a real emphasis on flexibility right now. Fortunately, both buyers and sellers seem to have gotten the memo, and deals are still getting inked, which means businesses are still growing.
Take two recent examples.
In one case, a local professional services firm reached an agreement with the owners of a company operating in a complimentary market to acquire the second company for some cash up front and a three year note for the balance of the purchase price. This seemed like a good deal for both parties. The buyer was adding capabilities it could offer to its existing clients and the seller wanted to “cash out” and use the money for a new venture.
Before due diligence was completed and the deal was closed, the seller had a couple of more bad months. The buyer got cold feet and lowered the offer.
The sellers were confident that the decline was not permanent. In fact, based on their pipeline, they thought prospects were better than when the deal was first negotiated. They were not willing to lower the price.
The deal almost came to a screeching halt.
However, the buyer and seller believed the deal was still good for both parties and they decided to try to find a solution. They settled on a deal structure that preserved the original purchase price, but converted some of the notes to equity in the combined company.
Not coincidentally, the new deal structure also means that the buyer and seller will have good reason to make sure the complimentary aspects of the combination are fully realized.
The second deal involves the acquisition of a Virginia-based distribution company by an individual who plans to be an owner-operator. They can agree on a price based on current performance, but the buyer is concerned that the company may lose key customers within the next 6 months. In such a case, the buyer does not want the company at any price. The seller is convinced that the accounts will survive. At first, he considered delaying the sale of the business. However, for personal reasons, he wanted to get out of the day-to-day management of the business as soon as possible. He was tired of life on the road visiting clients.
Recognizing that each party has valid concerns (a key step in the negotiation process) the two are considering a creative solution. The buyer will make a modest down-payment and will begin running the day-to-day operations of the company. The remainder of the purchase price will be placed in escrow to be paid to the seller at the end of 6 months. The buyer will have the option to reclaim the escrowed amount if the accounts are lost.
In this case, the buyer will limit his risk to the amount of the down payment and the value of his time. The seller does not have to wait and will get a fair price if his company does not lose customers.
Buyers and sellers of businesses have always looked for creative ways to get the deals done.
But the volatility of today’s economy has made the gap between the optimistic view of the seller and the pessimistic view of the buyer wider than ever and the old saying that “you can name the price if I can name the terms” has never been more true.
Deals are still getting done, but it takes more creative solutions and harder negotiations than before.
Stan Maupin is a managing director with Transact Capital Partners and has worked with technology and emerging growth businesses in Virginia for more than 25 years. He is also a founding member of the Richmond Venture Forum and the Greater Richmond Technology Council.
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