When A Business Buyer Offers Way Less Than The Seller's Expectations

So last week I told you about the two options I offered the seller: one was a full price offer but with only a 25% down payment and seller financing for the balance, which the seller was not too pleased about.

The second option was a performance-based deal whereby the seller would earn an ongoing royalty, receive a very good salary to remain involved as an employee and I would commit to funding the expansion as long as certain milestones were achieved. However, under this scenario, the seller would only get 5% cash upfront.

If you put yourself in the seller’s shoes for a moment and with him not being all too happy with 25% down in the first option, you would obviously not be thrilled with a second offer at a fraction of the down payment.

So what did the seller tell me to do with the second option?

He told me point blank to “write it up!”

That’s right; he was all in favor of the deal.

Of course I did not spend anytime inquiring why he chose that option since my priority was getting the deal drafted. Finding out his reasons would come later on.

I had my attorney draw up a very robust terms sheet/Letter of Intent that was binding upon the seller. We executed that quickly and moved to a full purchase agreement expeditiously.

Within three days we had the agreement signed, and we entered into a formalized due diligence phase although I had already conducted the majority of the work. As such, there were not too many contingencies left to remove.

Finally, the time came to really find out the seller’s rationale. Here’s what he told me

He explained clearly that he believed in the business but also knew that he did not have the resources nor the business acumen to get the business to where he felt it could. Throughout our discussions he said, I had delivered everything I said I would in the time I said it would be done. He never felt pressured by me, and also felt strongly that I could execute the plan and grow the business. Ultimately he said that I impressed him because I questioned every single aspect of his business, and forced him to really think about how the business operated, and moreoever, to provide qualtifiable data for his projections.

Now, please do not take that last statement as a self-serving or conceited statement. Rather, it is critical for every prospective business buyer to realize how important it is to impress a seller if you are truly serious about acquiring their business. Certainly, if you want to have any chance to get them to finance the deal or accept terms below their expectations, they have to believe in you and trust you. They must be convinced that you can take over the business and manage it well.

Deal structures do not have to be traditional, and sellers, especially in today's market, have to be open-minded if they are truly serious about selling. But, if you do not establish credibility with a seller, you will not get them to move much in their terms.

For this particular seller, he made up his mind early that I’m the guy to buy his business just as I decided early on that I want the business. And when a seller and buyer can establish that kind of mutual respect and trust, and they are both committed to a deal, nothing ever gets in the way.

So that is the end of the saga, which really was no saga at all. It is a done deal and the transaction is closed. I am now working diligently to complete the transition smoothly.

I shall keep you posted as we progress.

Comments

[Mark Bodzin]

Richard: Congratulations. As we discussed a year ago, to get deals done in the "environment" you must be creative. And YOU were! I will tell you that Wells Fargo contacted me recently and convinced me that the bank is serious about making SBA backed loans. First time a bank took me to lunch in over a year. I am now working with businesses again that require third party financing and will let you know as soon as I close the first deal. What I really want to know is where you found an attorney that produced a contract in 3 days?! Mark

[Phil Friedman]

Excellent way to negotiate a purchase by offering several innovative options. It would be interesting to know the details of your second option. This sounds like a recipe which can be repeated in other purchases.

FROM RICHARD: PHIL - FEEL FREE TO EMAIL ME THROUGH THE DIOMO.COM CONTACT PAGE AND I WILL HAPPY TO SHARE THE GENERAL DETAILS WITH YOU