There comes a time in every private business lifecycle when the owner has an opportunity to monetize their hard work and sell their business. There typically are mixed emotions associated with the thought of exiting your business and turning your lifelong passion over to new owners.
Various factors may lead to the exit decision including age, health, lifestyle, energy, lack of succession planning, or family matters. Regardless of the ultimate reason, it’s often very difficult to walk away from something that you have built.
The process of selling a business can go in many directions but often involves some or all of the following steps.
Understanding the Five Key Stages of a Third-Party Business Sale
Step 1: Engage professional advisers such as your CPA, investment banker, or legal counsel to help to determine the value of your business.
During this period, you can take steps to make your business more attractive to potentially interested parties. Your advisers will typically prepare a Confidential Information Memorandum (CIM), including details of your company’s operations, financial information, and growth opportunities. This provides prospective buyers with an in-depth, confidential overview of your company, after a Non-Disclosure Agreement (NDA) is signed.
Step 2: Solicit letters of interest, whereby interested parties will indicate their interest to continue discussions.
This process provides an opportunity for you to evaluate potential buyers and evaluate which may be a good fit with your exit plans. You and your advisers may narrow the field of potential suitors to a manageable number, say, three to five buyers.
Step 3: Request non-binding letters of intent (LOI) from your interested parties and negotiate the preliminary terms and conditions of a transaction.
The LOI often serves as a “term sheet,” defining price, structure, and timeline. As the LOI often includes an exclusivity (no-shop) clause, you should be comfortable with the other significant terms in the LOI before signing it because your company will essentially be “off the market” for the agreed-upon term of the LOI.
Although the LOI in non-binding as to the commitment of both parties to consummate the purchase/sale, the “no-shop” clause in the LOI is legally binding on the seller under its provisions, which eliminates your ability to discuss a transaction with any other parties.
Step 4: The buyer conducts its due diligence on your company’s operations, which includes a thorough evaluation of financial, legal, and operational matters.
Depending on the company, the due diligence process could take several weeks or months to complete. Often during the due diligence phase the buyer will identify items that may require adjustments to the purchase price or terms offered in the LOI.
Step 5: Assuming satisfactory due diligence by the buyer, the purchase agreement will be prepared and negotiated.
The purchase agreement, which can be an asset purchase agreement or stock purchase agreement, is the legally binding contract. This is another place where the buyer often looks to modify terms or provisions it offered in the LOI.
Where Deals Begin to Shift: How Buyers Create Leverage Late in the Process
In steps four and five, the buyer may identify items for which it wants to adjust the purchase agreement. This is the buyer’s opportunity to chip away at its supposed negotiated purchase price.
The adjustments that the buyer proposes may appear individually small but, often in the aggregate, they can be quite large. The result is a reduction in value or deterioration in terms for the seller.
This is the point at which the buyer anticipates that “seller fatigue” will kick in. The buyer is banking on the fact that you’ve invested too much time, energy, and money to walk away from the deal and that you’ll concede on many, if not all, of the revised terms that the buyer is requesting.
In the buyer’s mind, they expect that you’ve already planned your post-transaction life and you’ll rationalize that the “new” revised deal is the best that is available.
Consequently, seller fatigue can have a dramatic effect on the monetized value of your business.
A Case Study in Standing Firm and Winning on Value
I worked with an owner that was selling his mechanical contracting business. He and the buyer followed steps one through three above and had what he believed was a negotiated agreed upon price. However, things changed during the due diligence phase and the buyer wanted to revisit the purchase price and certain other key terms and conditions. To the owner’s credit, he exercised his ability to walk away from the transaction.
The same scenario happened again almost two years later with the same buyer. The seller again walked away. In about another year, and for a third time, the same buyer came calling and the seller made it clear that his terms were “take it or leave it.” The buyer understood what it would take to acquire the business.
Ultimately, the deal closed at far more than the buyer had originally negotiated several years prior. The seller was unwilling to succumb to seller fatigue and, consequently, received a favorable transaction price.
Protect Your Value by Negotiating with Discipline and Strength
Moral of the story: Take your time and leverage your professional advisers when negotiating the LOI when it comes time to sell your business. Incorporate all of the critical terms and conditions in the LOI to avoid doubt or confusion during the preparation of the purchase agreement.
When you’re in a position of strength, stand your ground and be willing to walk away versus reluctantly accepting an inferior deal. Be aware of the possibility of seller fatigue and don’t let it diminish the value of what you created or earned.
Planning to Sell Your Business? Start With a Clear Strategy
Selling your business is one of the most significant financial decisions you’ll ever make. Thoughtful transition and exit planning can help you anticipate buyer scrutiny, strengthen your negotiating position, and reduce the risk of value erosion caused by late-stage deal pressure or seller fatigue.
Learn how our Transition and Exit Planning specialists help business owners clarify objectives, identify potential risks, and prepare their companies for a successful transaction—whether an exit is months or years away. From early-stage planning through transaction execution, our professionals focus on helping you maintain control of the process, negotiate from a position of strength, and protect the value you’ve worked so hard to build.