Vetting Potential Buyers During a Business Sale
The selling process can be long for some business owners, especially when approached by potential buyers who lack the necessary capital to successfully negotiate and fund a transaction. In such situations, sellers are often left with broken deal costs and fatigue to show for their efforts. Doeren Mayhew Capital Advisors encourages sellers to consider these common traits to help vet unqualified acquirers.
A common misconception is that every private equity (PE) firm has committed capital to deploy out of a previously raised fund to finance a deal. In actuality, PE firms with committed capital are far outnumbered by “deal searchers” that have branded themselves as PE firms. PE firms lacking committed capital seek out acquisition targets and have them sign Letters of Interest (LOI) that often include financing contingencies. Once a signed LOI is secured, they shop the deal to PE firms with committed capital, resulting in an additional layer of expenses for the business owner to compensate the fundless equity sponsor for identifying the acquisition. If approached by a PE firm, speak with a trusted advisor regarding the buyer before committing the time and dollars necessary to reach an LOI.
Use of Binding Terms
Sellers are often presented LOIs with excessive binding terms. For example, fundless equity sponsors often seek lengthy exclusivity periods to provide them with sufficient time to raise the necessary capital to fund the transaction. While a two- to three-month exclusivity period seems like a reasonable amount of time, it should only last 45 to 60 days for the buyer to conduct due diligence activities. Before agreeing to final LOI terms, be sure it is a non-binding agreement (aside for certain sections such as confidentiality, exclusivity, applicable law, etc.) that includes a reasonable timeframe for the due diligence process and complete confidentiality of the deal.
A buyer’s relationship with their lender is a key factor in the buyer’s price, terms and ultimate ability to complete a transaction. Serious buyers will not provide price or terms without prior guidance from their lender to ensure they will not have to re-trade the deal. Learn more about a buyer’s relationship with lenders by asking:
- What discussions have they had with lenders regarding the transaction?
- Have they received a debt read on the deal?
- Will they use any of their own capital to fund the deal?
This will help ensure the buyer has the debt to complete the transaction. If a buyer is not able to secure as much debt as previously expected, they will either have to reduce their purchase price or accept a lower return on investment.
For more information on what to do if approached by a buyer, contact Doeren Mayhew Capital Advisors.