Sell-Side M&A Masterclass | Structuring a Formal Sale Process for Maximum Value | Private Equity

Hi, I’m Paul Giannamore. I’m an investment banker, and I negotiate for a living, primarily the sale of businesses. I’ve been doing this well over 20 years, and the majority of what I’ve learned is actually hard-fought battles out in the field getting deals done. You know, there’s been a tremendous amount of ink spilled over the years on negotiation.

And, quite frankly, there’s a lot of great books. I’ve got Getting to Yes, Never Split the Difference, Bargaining for Advantage. Some of the issues that I have with some of these books, though, is that while they’re great if you’re going to get involved in hostage negotiations, budget negotiations in Congress, or signing an international treaty, when you’re trying to sell a financial asset, they’re not particularly helpful, because they focus largely on the cooperative nature of negotiations: probing problems, finding solutions, finding common ground, getting to yes. At the end of the day, though, when you’re selling a business, it’s not that simple. And what we’re going to talk about today is some of the dynamics and the skills that are required to be a great negotiator. Because in my mind, all else being equal, the best negotiator is going to really be able to maximize the value of his or her business, right? And so understanding the dynamics at play, and also understanding how to create a formal sell-side process, because negotiation really is a process. And I think if you read some of the literature, you’ll quickly see that negotiation is in itself a process.

So understanding the process, how to be a process setter, how to control that process, will, for you as a seller, put a tremendously greater amount of cash in your pocket. Before we talk about negotiation in and of itself, I wanted to talk a little bit about valuation and price. You know, a business is not like a pack of batteries, right?

It’s got a price tag on it. You go into the store, it’s 6.99, you buy it. A business doesn’t have a price tag. The price of a business is arrived at at the bargaining table through negotiation. And so, all else being equal, the better you are at negotiating, the likely higher price you’re gonna get, and the better terms you’re gonna get for yourself.

Today, we’re gonna craft a formal sell-side process, and I’m gonna take you through what an investment banker does, or a sell-side advisor, when he negotiates a sell-side M&A deal, so the sale of the business. But before we get into that, I wanted to discuss a lot of aspects to negotiations that people really don’t, and there is somewhat of a structure to this. And when you think about negotiations in general, some components that come to my mind instantly, and one of the most important, is leverage. And I will use those interchangeably today throughout our discussion.

But when I talk about leverage, I tend to break that down into a variety of different factors, right? For example, you could have leverage against the other side by using deadlines that impact them and don’t impact you. You know, if you think about a labor negotiation, right? We’re going on strike. It’s happening tomorrow at midnight.

And, you know, all of the concessions tend to happen right before midnight. That’s a deadline that impacts both the buy side and the sell side effectively. But you also have deadlines that would only impact one side. So, for example, if you want to buy this business, you have to tender an offer by 5 p.m. on Friday.

Otherwise, we’re not bringing you into the process. You’re out. You have no opportunity to be able to buy the business. That doesn’t affect you, the seller. It affects the buyer. And so time is one attribute to leverage. Another attribute to leverage that’s extremely important to consider, and probably in my mind the most important, is optionality, or competition.

And I’ll use those two terms interchangeably. You know, whenever you have an asset and you increase the number of buyers that are vying to acquire that asset, you’re naturally going to raise the price. I mean, if you think about a public auction, right, and you’re selling a van Gogh painting, if you’ve got one buyer sitting there with his paddle out in the audience versus a hundred, it doesn’t take a whole lot of common sense to determine you’re in much better shape having a lot of buyers out there.

So competition is an extremely important aspect of leverage. But there are other aspects of leverage that are somewhat under the surface, and those are aspects such as necessity or desire. So when I think about necessity, you know, it’s not often that somebody’s in a position where they have to sell their business. Now, it happens from time to time.

I’ve seen business owners pass away and the family being stuck with a massive estate tax bill and being forced to sell, right? So that does happen. Deaths, divorces could, you know, maybe not create necessity, but at least a strong desire to dispose of an asset. So necessity comes into play. So, for example, if I had a business and I wanted to sell it, and you came to me and said, “Hey Paul, I’d really like to buy your business,” and I needed to sell for whatever reason. Let’s say that if I didn’t sell it, I was going to go bankrupt because I have a lot of loans I’ve got to pay off. Well, the last thing that I would do as a seller is tell you that this is a forced sale or a fire sale. Right? I mean, that would dramatically undercut the leverage in our discussion.

So I would want to conceal that fact. The same thing comes in when we talk about desire, or the disparity of desire between a buyer and seller. You know, at the end of the day, who wants to do the deal more tends to have the least amount of leverage in that sort of discussion. You know, the old saying is, in order to get the best price, you’ve got to be able to walk away.

Now, clearly that works up to a point, and then sometimes you literally find yourself walking away with no deal. And we’re going to talk a little bit about how to deal with that situation. Leverage, or power, is extremely important. And what I want to impress on you today is that leverage is often not absolute.

Leverage is often perception. So just like beauty is in the eyes of the beholder, leverage is oftentimes in the eyes of the beholder as well. And both sides, both buyer and seller, can mold perceptions by how they run a process. And they could appear to be far stronger than they are. And so going into any sort of negotiation, you really need to think about perceptions.

So guarding perceptions on your side, but really understanding what’s going on on the other side. And there’s a few ways that you do that. One of the ways is through the use of information, or knowledge. And this is an important attribute to a phenomenally skilled negotiator: to be able to ferret out information on the other side that helps you appreciate leverage factors, and conceal potential information on your side of the table that would potentially provide negative leverage to you. So concealing the fact that I absolutely have to sell my business, otherwise I’ll go bankrupt, that’s information that I need to conceal. Now, on the other side of the table, you might be trying to ferret out as much information as possible in order to understand how badly that acquirer needs to actually buy a business, right?

Is it a defensive play? Do you have a business that if Acquirer A were to buy, it would keep Acquirer B out of that market, therefore Acquirer A would be willing to pay more money for that? Is there an executive at the acquirer whose job is on the line pending this acquisition? So there’s a variety of instances that can impact the disparity of desire between the two parties, and it’s your job on the sell side to ferret that out. And that often doesn’t happen through direct questioning.

It’s putting together the mosaic, right? It’s a lot of reasoning through inference. It’s spending a lot of time listening. It’s spending a lot of time doing research before you even start the process. But the flow of information is an extremely important aspect of a negotiation process, and we’re going to go further into that as we walk through a formal sell-side process. Another key aspect is judgment. And this is often where inexperienced negotiators really get their asses handed to themselves. You know, the old saying, you’ve got to know when to hold them, and you’ve got to know when to fold them. You’ve got to know when to bluff.

You’ve got to really understand what sort of leverage, actual leverage, exists on the other side. What sort of actual leverage exists on your side. Attempt to mold the perception of the other side so that they believe that you have more leverage than they do. And then you have to use judgment as to your interactions between the parties.

And a lot of this judgment really comes down to emotional detachment. You know, I’ve often said that the worst person to negotiate for me is me. I am too emotionally attached to my own assets, my own life, to actually be a good negotiator on my behalf. But I’ve learned this actually at a young age, because I’ve spent the majority of my life negotiating on behalf of others, that I know I’m not a good negotiator.

So when I buy a car, I don’t even show up personally at the showroom. I might go and test drive a car here or there, but when it’s time to negotiate the purchase of that car, I send somebody in. Almost all of our big corporate negotiations get done by somebody else, not me. And there’s a benefit, right, to putting the decision maker in the background.

If I’m the decision maker, and in your case, if you own a business and you’re the decision maker, it doesn’t make great sense for you to be at the bargaining table. Having an agent bargain on your behalf, and having some authority to make some concessions and score some wins, of course, is extremely helpful. But at the end of the day, stepping back from the bargaining table and remaining very emotionally detached will allow you to operate under pressure. It will allow the threats from the other side to basically just roll off your back, and you’ll make far better decisions. And I guarantee, if you remain emotionally detached and you allow somebody else to negotiate on your behalf, you’re likely to have a much better outcome.

In addition to exercising great judgment, another very, very important attribute to an outstanding negotiator is building credibility. And I don’t think a lot of people think about this, particularly those that are not particularly skilled in negotiating, prior to starting a process. You know, when I was in private equity, I would go out and acquire businesses.

You know, our firm would reach out to business owners. So, if you’re a business owner out there, you probably get emails, you get calls. I had a lot of my sell-side brokers tracking you down, saying, “Hey, I represent XYZ private equity firm.

They’re really interested in your space. They want to do a deal. We love your company. It seems great. Give us a call. Let’s have a chat.” So in my capacity at American Capital, which was the largest publicly traded buyout shop at the time, the firm would make a lot of reach-outs. We would hear from sellers, and we would try to build relationships with them.

The first thing that we try to do is get investment from the potential seller. Because the more time and effort somebody invests into a process, into a buyer, the more likely that they are to actually go through a deal. So we would try to get out in front of them quickly, take them out to dinner, wine them and dine them, and have them invest in a relationship.

We were also trying to build relationships, you know, that we would actually do what we say we would do. But one of the things that I think was lost on a lot of the sellers who represented themselves in some of these transactions is, it’s really hard to negotiate with somebody if they don’t believe what you said.

Let’s say I work for the private equity firm. I’m talking to Jim. Jim’s very interested in doing a deal with us. He wants to sell his mechanical contracting business. It’s a 20 million firm. And we put an offer on the table for 20 million bucks, but Jim wants 30. Jim might spend a lot of time having discussions with us.

He might poo-poo the offer: “Hey, I really wanted more than 20. I really wanted to get 30 to get this thing done.” And then as we start to put the LOI on the table, or the letter of intent, all of a sudden Jim out of nowhere says, “Well, hey, I’ve got another offer for 32 million. So unless you can match 32 million, I’m going with the other offer.”

Now, Jim may have been telling the truth, but more times than not, Jim was bluffing. And if Jim hadn’t done the work to build up the credibility throughout the duration of the relationship, the easiest thing for us to do was call this bluff. Now, calling a bluff — and we’re going to talk about this a little bit later in our discussion — is not always the right thing to do, because, you know, the worst thing is, he tells you, “I want 32 million, otherwise I’m not doing a deal with you,” and you were actually willing to pay the 32 million, but you said no way, and called this bluff. And it turns out he was bluffing, and then somebody else came in the next day and bought it for 31 million. And those sorts of things happen. So there’s some dynamics at play with regard to bluffing, which we’re going to discuss. But, you know, building up credibility is very important, because the more credible you are, you know, in any sort of negotiation, there’s going to be aspects that are extremely important to you, and some that are not. You might be particularly concerned about price, but you don’t care so much about a holdback term, for example. If you’ve built up that credibility and you’re able to trade those things with the other side, the other side actually believes you, you’re going to have a much easier time getting what you want.

And at the end of the day, exercising power is really getting others to do what you want.

Now, as we discussed earlier, negotiation is a process. And one of the most important questions that I have to answer as an investment banker is, what process? You see, as a sell-side M&A advisor, I’m negotiating two things simultaneously. I’m negotiating process, so the rules and how the buyers have to work with us, as well as the substance, so the price and the terms of the transaction.

There’s somewhat of a smorgasbord of options that I could choose from from a process perspective. But at the end of the day, in order to create a process that really maximizes the value and the price for my client, I need to form a process that incorporates everything we just discussed, right? Number one, a process that allows us to ascertain information about every buyer.

What are the buyer’s motivations? What are the buyer’s incentives? The level of desire the buyer has in order to do the deal. Is there any buyer that has a necessity to do a deal, which is extremely rare, but it can happen? So it’s ferreting out information. Also, my process needs to be able to protect information and conceal information on my side.

So I’ve got to be able to conceal my client’s desires. Is there a necessity? How badly do they want to do a deal? If there’s any particular problems, that needs to be concealed. And so the process has to help me with that. Number two, the process has to provide maximum leverage through optionality, meaning I have to have enough competitors in here to drive up the price, right?

I have to be running my own auction. I have to have a lot of buyers bidding against each other to help me raise the price. And so in the process that I need to create, although I will be doing some cross-table negotiation, right, I will be negotiating directly with a buyer, I also want buyers to be doing same-side-of-the-table negotiations.

So if you imagine a handful of buyers sitting on the other side of the table, I want them negotiating amongst themselves through competition to bid up the price. So the process has to ferret out information, conceal information. It has to introduce the concept of competition, which gives me leverage. I also want to be able to use time, right?

So in setting the process rules, I will be setting deadlines throughout, where all buyers will have to act simultaneously. There’s bid deadlines, where bids have to be submitted at a certain time. I need to be able to control that. That allows me to set a deadline that impacts the other side simultaneously, but does not impact me.

So I’m using time. I’m also using time for other advantages. I’m using time from an investment perspective. I’ve got one unique asset, my client’s business. I’ve got 25 buyers. I want each of those 25 buyers to go through a process, to continue to invest time, money, and resources, as well as time into the relationship with my client, the seller.

And the seller actually is doing that simultaneously with 25 buyers. So I’m able to create a tremendous amount of investment with my client over a period of months with the buyers, which will positively impact the leverage that I have in the situation. So I’m using time, I’m using information, I’m using leverage through competition.

And I’m also strengthening my credibility from the very onset. Let’s say that you own a business and you’ve been talking to one particular acquirer for a few weeks now. You’ve gone out to dinner, he’s come to your office, you’ve started to talk some numbers, you’ve shared some numbers. He comes back and says, “I want to buy your business for 20 million,” and you want to sell it for 30 million.

If this goes on for some weeks, and then at the very last minute you tell him, “Hey, I really want more money for my business. I’m going to go out and introduce competition into this process. I’m going to go out and do some other acquirers,” this could do one of a couple of things. Number one, the buyer could automatically get his act in gear, because he doesn’t want competition, and he could raise his price. Or two, and what’s often very common, he’ll get frustrated.

He’ll feel like you had built a rapport with him, that you wanted to sell your business to him. And then all of a sudden now, because you weren’t getting your way, you were going to introduce some competition, which is adverse, of course, to his position. And so that frustrates the relationship, and you lose some credibility.

And I’m a firm believer that if you start from the onset introducing all the leverage factors and molding the perception of the other side, you can maintain credibility throughout the process. And what I mean by that is, by bringing competition in right off the bat, where all of the buyers know that there’s a variety of buyers here.

This is a formal sell-side process. They will be competing against other buyers in order to have the opportunity to buy this asset. You’re not switching anything up on them last minute, and you can maintain that credibility throughout the process. So these key components go into how we can construct a formal sell-side process that will maximize the value of your business. And here’s how this works in practice.

When a seller comes in to me and says, “Hey Paul, I’ve got a 20 million in revenue lawn care business, and I want to sell this company. I would like to sell it within the next year. Can you take a look at it?” one of the first things we do at Potomac is we’ll execute a nondisclosure agreement, and we’ll say, “Sure, send us your financial statements.”

We will ask some questions. We’ll spend some time with the potential client on the phone. We don’t even ask for an engagement off the bat. We’ll just sign a nondisclosure agreement, and we’ll do some upfront work, and we’ll take a look at the business, and we’ll determine what we think it’s potentially worth.

And we’ll have conversations with the seller. And that, of course, is part of the whole information process. And what I mean by that is, we have access, obviously, due to all the transactions that we do and all the data that we have. We know what all the comparable acquisition statistics are. So we know what other lawn care businesses are trading for around the country.

And we can use some of that to inform our valuation decision with regard to that particular client. But, you know, that’s not the end-all be-all. I think we should always keep in mind that comparable acquisition statistics can be helpful, but there are a lot of instances where, you know, those tend to just be averages, and there tends to be a lot of outliers.

Some really on the high end, some on the low end. So an advisor that has great experience and judgment is going to be able to help you kind of understand where you’ll fit. So the first part is beginning to ferret out information. What do the comps look like? What’s the valuation and market conditions in the current market?

What are the likely buyers, right? Is this business in an area where you might have some defensive acquisition activity taking place? Is this where private equity firms are acquiring platforms, are doing add-on acquisitions? There’s a lot that goes into this. But by using all this information, you’re able to determine and set realistic expectations.

So the first part of any sell-side process is understanding what realistic expectations are. What are you likely to sell this business for? And before we ever go to market with a client, I like to be able to see eye to eye. And over the last 10 years, as we’ve seen valuations continue to ramp up, and then we’ve lived in an era of asset price inflation, right, valuations — I mean, look at the stock market even today. It’s still pretty close to an all-time high. So valuations have continued to increase. This has benefited the owners of businesses and financial assets, and oftentimes our realistic expectations, when we go out into the market, tend to be conservative, really.

I mean, we’re surprised quite often to the upside. And I will tell you, back in 2009 and 2010, we were very often surprised to the downside. And, quite frankly, we were surprised so much that a lot of the deals didn’t happen. Right? I could, just talking the other day, I remember in 2009, just a very small number of deals even took place.

But in this particular market, setting realistic expectations — so let’s just use some random examples here. You’ve got a business and you say, “You know what, I’m sitting down with my advisor, we’re taking a look at the comps, we’re running a DCF, we’re looking at a transaction model, we’re tweaking things, we’re going to try to go to market within the next 12 months.”

There’s a variety of little tweaks we can make to the business, but for all intents and purposes, within a year out, there’s not a tremendous amount you can do. But now we know that this business will likely sell for 50 million, right? So this is kind of like the meaty part of the bell curve.

This is likely where it will happen. Now, if you get super lucky, and a new acquirer comes into the market, or a private equity firm decides they’ve got a pay to play and that’s a perfect platform, could you get 55? Could you get 60? Could you get 75? Yes. I’ve seen it happen just this year. We went out to market with a company that we thought was going to get 50 million, and a private equity firm came in and paid 75 million for it.

So those things do happen. But setting realistic expectations will kind of help you on the onset. One of the things that I have to fight against personally, and I’ve had to do it for over 20 years: when you’re involved in a lot of transactions, and you’re seeing, you know, 50 pest control or 50 lawn care deals per year, and you’re seeing that all of these purchase price multiples tend to cluster in a particular area, it’s very easy to look at the subject company and say, “Okay, based on the comps, this is what this thing is selling for.

This is going to sell for 50 million.” And you tend to lose the high expectations and aspirations that you would otherwise have. And I always talk to my team about, you know, it’s important for us to be forthright with the client, like, “Hey, this is the reasonable expectation, 50 million.” But when we go out to market, we’re not shooting for 50 million.

We’re shooting for 80, right? We’re shooting for a very aspirational price. And in one of my earlier talks, I always talked about negotiating like a child. When kids want something, they don’t take no for an answer. Like, no is just an opening bargaining position, right? A kid wants ice cream. He goes to his mom, and his mom says, “No, you’re about to eat dinner.

No ice cream.” “Fine. I’ll accept that.” No, that wasn’t really a no. “I’m gonna go to my dad. Dad, can I have the ice cream?” They begin to divide and conquer, and they just have at it, and they yap until somebody gives in, and they ultimately get it. So having high aspirations, right? Having the aspirations of a child, like “I want to go to the moon.

I’m going to be an astronaut,” is very important for M&A advisors. And it’s unfortunate, because I do see it quite often, that M&A advisors want to just get a deal done, and it’s safe to do a deal in range, right? That’s where market is. Let’s get it done. Chop, chop, chop, turn, burn. But here at my firm, at Potomac, we always focus on having extremely high aspirations, which, by the way, is sometimes difficult working with a client, because we tell the client it’s likely 50 million dollars, but we’re aspirational that we can hit 80. Now, of course, the second the word 80 comes out of my mouth, the client anchors to 80, and it’s an 80 million business. But I would rather take that risk and have them anchor high than be set on the 50, because the higher our aspirations, the greater the chance that we’re going to exceed that.

So again, it’s very important to give a realistic range to the client, but it’s also very important to come up with the aspirational range, which I typically tell clients, like, “Listen, if lightning strikes twice, everything goes in your favor, if a buyer comes in and absolutely needs to buy this business in this particular location, the business has the right capabilities, all stars aligned, you have a possibility of getting all the way here.”

Now, the chances of that happening are slim, but it’s a possibility. Listen, I know clients never come in with a 20 million business and say, “Yeah, you know what? I just want 10 million bucks for my business.” I know clients always want more than their business will likely sell for in that reasonable range.

But again, setting aspirations is important, because in the game of negotiation, so much of this is psychological, right? So much of this is perception. So aiming for the stars is the only way to put you in a position to actually be able to do that. So you need to do that with each client. So now that we’ve done the research, right, we’ve taken a look at the business, we’ve gotten a sense for a realistic range, we have an aspirational number that we want to hit. Now it’s time to start to craft the process. We’ve got to put together a formal game plan. And there’s a variety of ways to sell a business, and they’re on a spectrum. On the one end of the spectrum, we have direct negotiation between one buyer and one seller, which is largely the worst way to ever sell a business. It usually ends in failure, low prices, and disappointment. On the other end of the spectrum, we have what’s called a controlled auction process. It is a very formal, rules-based process. And you have this spectrum. The majority of middle market businesses, though, when the processes are run correctly, are typically sold somewhere in the middle, which I refer to as a quasi-auction or a modified auction.

Now, I’m not going to go into auction theory today. I did a speech earlier this year at the AzPPO conference. We’ll put a link in the comments. You can take a look at that if you’re interested in understanding more about the difference between a controlled auction, a modified auction, and how well that works.

For our purposes today, we’re going to focus right in the middle, at the modified auction. And that is the best process, typically, for middle market businesses. And if your investment banker is worth his salt, this is the process that he’s going to construct. So we’ve got realistic expectations. We have an aspirational price.

Now it’s time to look at the acquisition universe. Again, leverage — we’re going to think about leverage and power, and the best way that we can get leverage is competition. So prior to going out to the market, as we’re formulating our game plan, we’re going to do some research on the acquisition universe.

And we’re going to look at all of the publicly traded national companies that are in your industry, right? If you own a lawn care business, we’re going to look at the national players. We’re going to look at the private equity-backed players. We’re going to look at some of the regional players. And depending upon how big your business is, we’re not going to call local competitors.

Oftentimes it doesn’t make sense. We’re going to be as broad as we possibly can with finding the acquirers to put into the acquisition universe, but we’re not going to boil the ocean. We’re not just throwing things up against the wall. I know a lot of times business brokers will sell businesses through listings, right?

And they’ll put a listing online, which to me was always somewhat asinine. I mean, in some ways it’s like selling an antique Stradivarius on Craigslist. It just never really made sense to me. And the facts speak for themselves. The processes usually don’t yield the seller nearly as much as they should.

If you actually go out hunting as opposed to just fishing, and throwing your bait in the water to see what bites — no, you’ve got to be a hunter in this particular case. You’ve got to get very sophisticated about the acquisition universe. So go out and figure out what private equity firms want to be in this market, what private equity firms are in this market, what national players are in this market.

And now you start to build an acquisition universe. So you’ve got a list of acquirers. And as you start to think about the list of acquirers, and you’re working on fine-tuning the business, and you’re putting together what we’ll oftentimes refer to as a CIM, a confidential information memo — sometimes it’s called an offering memo, sometimes it’s called a book, I mean, there’s a variety of terms for it — but effectively what you’re doing is you’re taking the financial statements, you’re summarizing the business, the operations, the employees, the history, so on and so forth, and you have a memo that might be 30 or 40 pages long.

And it’s this memo that every acquirer is going to have an opportunity to take a look at, and they’ll be required to make their initial bid based on these materials. So we figure out who the acquirers are, and then we think about, as we’re drafting the CIM, now we set up a timeline. The timeline is very important, because, again, one of the most important things that you can do on the sell side is control process.

So as a sell-side advisor, you are establishing the timeline. When do the nondisclosure agreements go out to buyers? So every buyer will sign a nondisclosure agreement. And if your advisor is doing his job, the nondisclosure agreement will have certain non-solicitation terms in there. Buyers can’t get your materials, figure out who your employees are, and say, “Oh man, this guy looks great.

Let’s go out and see if we can hire him.” No. You want non-solicitation of employees and customers built right into that nondisclosure agreement. But the nondisclosure agreement will go out first, then the sell-side materials, the CIM. The acquirers will have an opportunity to review that, submit some questions, and then the process carries on from there. And what we’ve done is, again, using these key ingredients and dynamics from negotiation, we’ve begun to build leverage, right? We brought in optionality from the get-go. We’re maintaining our credibility, because it’s a formal sell-side process, and all the buyers know that.

A variety of different acquirers will be looking at this. We are controlling this process, because we’re setting the timeline. And what will typically happen in a controlled process like this is, the materials go out the door. The acquirers might have two weeks, they might have a month, it depends, and this varies, and it varies, quite frankly, based on seasonality, right?

Like, sometimes if you were to go to market in late fall, well, you know, Thanksgiving’s coming up, you know Christmas is coming up. You can’t really push acquirers to move quickly, because people take a lot of vacations. Same thing in summer. Like, July is a horrible time to put acquirers under, you know, a two-week deadline. So you have to be cognizant of seasonality. But it could be anywhere from a couple of weeks to a month. And at that point in time, what we tend to ask for is, we’ll send out a letter, a process letter, along with the CIM, that’ll say, “On Wednesday, the 15th, at 5 p.m., your proposal for the acquisition of XYZ Company is due.” This proposal should include — and we want to see a variety of different things. We want to see price, and we’d like to see it in an absolute term as opposed to a range. I’d rather see, “I’m paying for it” — I’d rather see it say, “We’re willing to pay 35 million” versus “We’re willing to pay 30 to 35.”

I want to know what the structure of the deal is. You know, are there seller notes? Are there any sort of holdbacks? Are there any earn-outs or contingencies? What does that look like? A statement of intent. What do you intend to do with the owner? What do you intend to do with the employees? Financing.

Like, do you actually have the money to do this deal, or do you have to borrow it? So there’s a handful of components that we request to be put into the proposal. But that initial proposal is typically referred to as an indication of interest. It’s oftentimes a document that’s one to three pages. It’s non-binding.

It’s a friendly letter that says, “Hey, we loved the opportunity of reviewing the materials on your client. We’re super excited about this space. We think it’s a great business. We’d be willing to pay X for it. Here’s how we’d structure it. We have cash on hand. You could just write a check, get the deal done.

Here’s what we’re going to do with the team,” so on and so forth. “We’d love the opportunity to meet with management.” Now, those proposals are all due on the same day. And there’s a reason for that. It is very, very difficult to review proposals serially. You always want to look at them in parallel. It’s the ability to compare and contrast offers, which allows clients and their advisors to determine which proposals — and this process, by doing it this way, keeps the seller away from the age-old problem of revealing information. And so I want to talk about this. So we’re using this deadline, this time here, to build leverage. But this deadline also allows us to conceal things. And here’s what it does. If you go out to market — let’s say that you’re selling your business and you talk to three different buyers, and you’re having some conversations, and you know, each buyer says, “Hey, give me some financial information.

I’m going to take a look at it.” And you hear from all the buyers, and all three of them want to do some sort of a deal, and they want to put together proposals, or a letter of intent. If you don’t have a deadline, now you’re waiting, right? You’re sitting there and you’re waiting. And so let’s say, you know, Jim at Acquirer A shows up and says, “Hey, Paul, here’s my offer.

I’m super excited about buying your business.” I look at it and I’m like, “Okay, it’s a 10 million offer. Seems great. I wish I could get more, but maybe it’s acceptable. I’m not sure. It depends on what the other two are going to do.” Now I’m waiting for the other two. And Jim happened to put at the bottom of the offer that, “Hey Paul, you’ve got five days to consider this.

You either accept it or reject it. And if you accept it, please sign and return it to me.” So now I’ve got an exploding offer. So what do I do? Well, I didn’t set a deadline, and now I’m calling Dennis and Ryan. Dennis and Ryan are the individuals at the other acquirers. And I called Dennis up, I say, “Dennis, you said you’re going to put in an offer.

I’m just curious, you know, what you’re going to do.” And Dennis starts asking questions like, “Hey, I didn’t think you were in a rush.” And you want to try to build competition for yourself. So, “Hey, I got an offer from another party.” And then I said, “Well, how much was more?” And you’re like, “I’m a little uncomfortable saying that.”

And you guys go back and forth. Well, you’ve done one good thing, which is you’ve introduced competition. But now you’ve put yourself in a bad position, because when we talk about disparity of desire, you are actually making the phone call, right? You’re chasing the girl now. And so you’re calling Dennis, and you’re going to be calling Ryan as well.

I mean, when you start asking for their offers, a lot of times it makes them start to ask a lot of questions, and really try to put you in a position, really try to understand the position that you might be in. And now you could say, “Hey, I’m interested in moving this forward quickly, because I have another offer that’s going to explode.”

But if you haven’t built the requisite amount of credibility, why should they believe you? Like, you could be bluffing about the other offer. You could actually be desperate to sell. So now you find yourself in somewhat of a pickle. And I know from absolute objective fact, from historically doing deals: every single time when I was in private equity, and every time a seller called me looking for an offer or seeking feedback, I knew I had somebody that had more desire to do a deal than I did.

Right? And so that definitely plays into the calculations as to what I’m willing to pay, and it absolutely should. You’ve put yourself in a bad position. You haven’t said “I want to sell,” but your actions are speaking louder than words. And sophisticated buyers are paying attention to this.

So how do you avoid that? At the very beginning of the process, you set up arbitrary deadlines. You want to play? Here’s when you’ve got to pay. You’ve got to tender your offer at such and such a time. And now you’re not calling these guys. And if they blow through the deadline — and you know, sometimes, as an advisor, I’m flexible.

People call me up and say, “Hey, we really want to do this deal, but boss man’s on vacation and I can’t get an approval on Monday.” No problem. Like, deadlines are made to be broken sometimes. But at the end of the day, it puts me in a position of power, and it puts you, the client, in a position of power, because now we’re not revealing anything, right?

We set this up from the get-go. This is what the deadlines do. No one’s chasing anyone. Buyers come to us. So the first deadline is for the indication of interest, and that indication of interest really kind of establishes — we say it sets markers, right? We’ve got, if we’re lucky — let’s say that, you know, in a typical process that we’re doing now in the resi and commercial services space, we’ll usually go out to somewhere between 30 and 40 private equity firms, and then somewhere between five and 10 actual strategic acquirers. They might be national players in a space, they may be large regionals, they might be private equity-backed platforms. But in any given deal, somewhere between 30 and 50 NDAs go out, and the majority of those get signed. And then somewhere between 30 and 50 information memos go out to those buyers, and they’re invited to provide us a proposal by the deadline, in the form of an IOI. You get the IOI, and now we’re able to lay them side by side. If we’re lucky, let’s say 50 go out and we get 10 IOIs. I would say that’s a really good day, right? We’ve got 10 IOIs, you’ve got 10 firms.

Now, I know that right off the bat, probably half of those, five of those, are some 23-year-old kid working in an office just writing IOIs, and the boss looks at it and says, “Yeah, throw it in. Let’s see what we can do.” But we’ve got 10 different things to look at. And from there, you know, the sell-side process is really a private — you know, it’s a concealed-bid private auction is really what it is.

And so we are going through iterative bid phases. And so we started the IOI, and then the next phase would be, okay, in order for an acquirer to really get a good sense of whether or not they want to do a deal, they have to meet with at least the owner, and likely the management team. And it depends upon the size of the company.

But for now, for our purposes today, let’s say they’re going to meet with a small group of the management team of your business. Three people. In a negotiation, there are concessions, and there’s reciprocity. There’s always quid pro quo. So, acquirer, you have tendered an IOI, you want a meeting with a management team, you have to do something for me.

There’s a quid pro quo. You have the ability to buy the option to sit down with management, but it’s going to cost you. So, “I’ve got your IOI. This is not going to cut it. This deal is not going to transact at this price. You need to revise your bid forward, raise your price, change your terms. Here’s some of the things we don’t like in your IOI. And if you’re willing to do that, we’ll know you’re a little bit more serious, and we’re going to be willing to sit down with you.”

And so you cause all buyers to purchase the ability to sit down with the management team. There’s no free ride in this. They revise their offer, they start showing us what we want, now they can sit down with management. So in that particular case, we get the IOIs, and we might say the first bid is due on June 1st, right?

“You’ve got 10 days. Revise your bid. You have five days,” what have you. And depending upon the time of year, we would change the structure here. But let’s say you’ve got five days, and now in that particular case, we might lose three, right? We might get seven revised bids. Three might say, “Hey, listen, I’m not willing to pay more than that.”

So now we’ve got seven. And we take a look at that, and then we as advisors have some decisions to make. Because although at times price and terms may all cluster, and it may be very, very close, other times there’s wide dispersions, right? We might have a 15 million offer, a 19 million offer, a 24 million offer, different sorts of structures.

So we have to determine who we’re going to let see management. And, you know, the old standby position is start with the lowest. You know, a 24 million offer, and you’ve got a 17 million dollar offer. You might go to the 17 million dollar guy and say, “Hey, listen, you’re really off the mark on this. And while we appreciate doing business with you, it makes no sense to have a meeting when you’re the lowest offer we have at hand.

So if you’re serious, I would, in good faith, revise your offer forward, and we’ll see if it makes sense for you to have a sit-down with management.” We might do the lowest offer and the second lowest. Hell, we might do that with all of them. I’m not quite sure yet. And kind of get that feel as we go through the process.

But if we do that, and let’s say another one falls out, and a few revise their bid forward, now they have the management meeting. So they sit down with management. And of course, after the management meeting, ideally what’s happening here is this: management is building a relationship with each buyer. So they are investing time and energy into each buyer, and the buyers invest time and resources in their relationship.

We want investment on both sides, the seller’s. I know that this is very cliché and probably goes without saying, but I see this as such a massive problem, I can’t not say this. And if you’re an M&A advisor out there, you’re going to laugh at this, because it boggles my mind. How? How very sophisticated, very kind, gentle individuals who have built great businesses could actually sit down with buyers and be total dicks and be condescending pricks.

Like, if you are a seller, every time you sit down with a buyer in a controlled environment, in a management meeting, you should only have eyes for that buyer. You should be smiling, pouring coffee. You should fight all desire to run your mouth, because you get far more information from listening than you do from talking.

So be sweet, be kind, take notes, have a notepad, take notes as buyers talk, listen, work with your advisor, and make sure you’ve got a full list of questions. Do your research on that private equity fund, do your research on the acquirer, do your research on the individuals. Have fun, sophisticated, well-thought-out questions in order to ascertain information.

Because again, this information — this is your opportunity to get a ton of information that you will use, and we will use, as we move through the process and try to ratchet up the price. So again, be sweet, be kind, be very humble, listen, be emotionally detached, don’t take anything too serious, have fun, have fun, smile and have fun. This is what you need to do.

I mean, I say this to every single client, and just like — I say it, and sometimes they go in there and do the exact opposite. So I guess now I am officially putting it on public record. This is what I say. Do it. So you go in, you sit down, and a management meeting is basically a situation where the acquirer will walk in with a CIM.

So they’ve studied the CIM, and they’ve got a variety of questions, and they may have sent over some questions in advance that we’d be prepared for. But the acquirer sits down and says, “Hey, Rob, love your business. Super excited about it. I’ve got questions about your president. I’ve got questions about your HR process.

I’ve got questions about your operations. I’ve got some random questions on the financial statements. And it looks like you guys had some non-cash charges last year. What happened there?” “Oh, we did some rebranding.” So you tend to have a relatively informal — and sometimes these are more formal and structured, but it’s a relatively informal meeting where you’re answering a lot of questions.

You might do a brief presentation on the history and the overview of the company, and talk about some of the competitive advantages you have, but it should be a relaxed and friendly and humorous situation. And then you’ll have dinner. Again, your goal is, number one, get information. Number two, conceal information.

If you’re getting a divorce, the acquirer doesn’t need to hear about it. If your wife is badgering you to buy the five million dollar yacht for the vacation you’ve got planned next March, and you need to get the company sold, don’t talk about it. If you’re facing a bankruptcy situation, or there’s anything that potentially increases the necessity or desire for you to do a deal, concealing that is not wrong, right?

Just don’t talk about it. But figure out what the other side’s up to. Why does the operator from the acquirer want to do this deal? How much value is he going to be able to create? So, “Hey, John, I love the fact that you guys are interested in my company. It’s taken me my whole life to build this. I really want to find the right home for it.

I care a tremendous amount about my people. You seem like the right guy to be able to pull this off. If we combine these two businesses, what are you going to do with it? Like, how are you going to be able to create value for XYZ Corp?” Now, John’s an operator. He’s not a negotiator. Like, you might have the corp dev guys there, you might have an M&A guy, but they often bring an operator who actually can understand your business.

And the operator might talk, might say, “Hey, this is your pest control business, 50 million dollar business. Here’s what I’m going to do. If I combine it in my area, I can get increased route density. I can shave off, you know, 300 basis points of cost off the gross margin line. We’ve got a lot of redundancies here.

I can remove a million dollars in costs here. I can do all these sorts of things. Hey, you guys have a great capability. I could take this mosquito capability and roll it all across a billion dollars in revenue, and increase my set.” These guys will go on and on and on and on. And that’s what we need to know, because at the end of the day, when we get to the end of the process, we’re going to reverse-engineer.

We’re going to say, “Okay, how much value can Acquirer A create by doing this deal?” Now, in theory, all synergies created in a deal, whether revenue enhancements or cost synergies, should belong to the buyer, because they’re writing a check. That’s not the way the world works. When I’ve got a bunch of competitors vying to buy a company, we’re going to extract as much of that value creation for ourselves, the sell side.

And if we really understand what that looks like, because we’ve asked the right questions, we didn’t talk too much, we were friendly and we got everyone else talking to us — like, what are their incentives? Like, “Hey, John, you’re the operator. Like, if you do this deal, what happens? How does this impact you?”

“Well, you know, my budget’s going to be bigger, and if I get this thing, you know, it might increase my bonus by 20%.” “That’s great. You know, I’m an A guy.” “Oh, you know, I get bonused on how much capital I commit.” So now we know that, hey, I’ve got some direct buy-in from these guys. Like, I’m negotiating with a corporation, but am I really?

Now I’m negotiating with guys who have jobs, who have families, who want money. And now they’ve just revealed to me that they’ve got financial incentives. Like, if I was blabbering the whole time and talking, I would never have figured that out. So figure that out, because we’re going to use that. Now, before we move on from this meeting, which effectively is a first date, I want to break this down a little bit.

I want to talk about roles here. As an investment banker, it’s my job to prepare you with questions, help you figure out the questions, help you understand who you’re talking to, help you understand what it is that we’re going to want to understand from you, the business owner. And you should really think about this as almost a first date with a woman.

You are a handsome, charming man, quite successful. You meet a girl. You have a conversation, you exchange a number. Now, this woman doesn’t know you, right? And so she’s had a quick conversation with you. She likes the way you look, you seem to be reasonably successful, you’re charming. So you exchange numbers, you set up a date with her, and you go on with your life.

Now, while you’re going on your day-to-day business — in the same way the acquirers have read the CIM and they’re going on their day-to-day business — she’s beginning to think about who you are as a man. And again, she doesn’t know much about you, so she’s creating these images in her mind of what you could be, right?

Is this her final opportunity to quit dating, right? Did she finally find the guy? And are you the guy? And she’s creating these ideas in her head of who you are. So how do guys screw this up? They go on the date, they talk about themselves the whole time, they run interview questions with a woman. They basically ruin the illusion.

So the image that she had in her mind of who you are — like, you’ve actually told her who you are, and that’s not exactly what she was thinking. So don’t screw this up, right? It’s the same way with the meetings with the acquirers. Like, you’re going to continue to be the charming, handsome man.

You’ve done well for yourself, got the nice company. You’re going to be friendly, you’re going to be playful, you’re going to listen to questions, you’re going to answer them, you’re going to ask engaging, thoughtful, open-ended questions. But at the end of the day, there’s nothing that you’re going to be able to do at this meeting to cause somebody to say, “Hey, I definitely want to pay more for this business because this guy is so awesome.” But you have this distinct opportunity of turning them off and saying like, “Hey, we’ll buy this, but we’re not paying a crazy price,” or “We’re just not interested.” So going into these meetings, you’re not looking to dazzle.

You’re looking to do damage mitigation at all costs. That’s how you have to look at this. And from my perspective as a banker, what I’m trying to do is, I’m trying to mold perception on the part of the acquirer. I’m not only trying to ferret out information, I’m taking notes, but I’m also trying to make sure that the acquirer understands that you’ve got a lot of options. And you’re going to naturally come off like you have a lot of options, because you just met with 10 different women in a three-day period.

You’re super excited, right? You’re the guy at the bar and all the chicks are coming up to you. That’s how I want you to feel, and that’s how I want you to naturally come off. And so doing these meetings and getting yourself into this mindset, I think, is very, very important. Because again, as I said earlier in the discussion, so much of this is perception versus reality.

So much of this negotiation game here is psychology. So we’ve got you high on your own supply. You’re all hopped up. You’re charming, and you’re funny, and you’re humorous, and you’re asking great questions, and you have a good meeting, and you’re very friendly to the acquirers. And then we move on to the next day.

After all the meetings are done, now it’s time for us to ask acquirers to tender a formal LOI. Now, up front they may have given us an IOI, and then an LOI, but now we’re going to ask them to revise their bid once again. And in a sell-side process, I never know how many rounds of bidding there will be.

Sometimes there’s one, sometimes there’s ten. I never know. What I’m trying to do is, each round, eliminate acquirers, push everyone up higher, and the lower ones, I want to boot them from the process. So on day two I ask for revised bids, and I say, “Next Monday at 5 PM, please tender your revised offer in order to effectively stay in the process.”

And we will continue to do that. And every time I ask for a revised bid, I’m providing more information. So of course, after that initial date that you had with them, the acquirers will have a lot more questions, right? They’re going to — I’m going to ask for a revised bid, and they’re going to say, “Hey, we need to understand trends in gross margins, and what’s going on with this big client.

And we noticed this, and we had issues about HR that we talked about, and how can we grapple with that?” A million different questions. We want to answer those acquirers’ questions, but in exchange for that, they’re going to have to come in with a higher bid. And you know, the best way to deal with that — and again, every process is unique.

What I will typically do is — let’s say after management meetings, now I have five bonafide acquirers that want to do the deal. We had ten, three fell out, then we had seven, now we have two fell out, we have five. So now I’ve got five bidders that have all asked me questions. We’re gonna take all of those questions and we’re gonna amalgamate them.

Five acquirers each give us ten questions, now we’ve got 50 questions. We’re gonna answer all those questions, and we’re gonna spend time going through them, and we might even add some additional questions to it. Who knows? Like, we just might. And we’re going to shape this, and we will send this question package, this data package, out to all acquirers simultaneously.

And we’re going to do that because oftentimes it’s important for other buyers to see some of the questions that other buyers are asking. Now, on occasion, there are questions in there that do us no good. Sometimes an acquirer could be more informed about a business, or about the principals of a business, than others.

Somebody might have had a drunk driving issue, for example, and it was one acquirer that found that. That’s not relevant to the transaction. You’re the seller. Got an L for drunk driving. You’re not going to be a part of the acquisition going forward. They shouldn’t care about your driving record. It’s not relevant to the discussion.

An acquirer does some research. They find this record. They might do a background search. They ask some questions about it. I’m not going to put that in the questionnaire package, because I don’t want to draw attention to something that is not relevant or germane in any way, shape, or form, and should not have any impact on your deal.

So I’m going to remove that. But for the most part, the big list of questions goes out to all of the acquirers. And now they’re like, “Okay, there are a lot of folks looking at this. There are a lot of folks asking a lot of questions. We need to sharpen our pencil. It’s time for the next round. Let’s bid.” And we continue to ask them to revise their bid forward until acquirers fall out. And, you know, I oftentimes find myself in a position where there might be two — depending on how we’re running the process, we might ultimately, at the end of the bidding, sign either a letter of intent or we might sign an exclusivity agreement and allow two or more acquirers to do diligence simultaneously. Now, allowing two or more acquirers to do diligence simultaneously is more similar to a full controlled auction rather than a modified auction. In a modified auction, you’re typically signing a letter of intent to one acquirer who has exclusive access to deal materials.

But we’re going to continue this process until we get to the point — I always tell every client, like, from a psychological perspective, you absolutely need to be agnostic as to who’s going to do this deal. And 50 percent of the time clients will say, “Hey, I know I’ve got a bunch of options, but I really like Y, or A.

They have a very similar culture to us. I’ve known those guys for years. I think my company would meld very well with theirs.” And while that may be all well and good, and all of those things true, you know, at the end of the day, we’re selling a business here. So we’re focused on money and terms.

And that acquirer should be treated just like every other acquirer. And they should go through the process simultaneously with the others. And you shouldn’t fall in love. You know, the second you start falling in love with one particular acquirer, now you have that disparity of desire, like you only have eyes for that particular acquirer.

You want to do a deal, and you’re willing to make accommodations, and that actually comes out in the process. So you need to attempt to blind yourself from that. Look at all acquirers equally, and let the facts speak for themselves. When we get towards the end of the bidding process, you know, once we start getting towards the end of the bidding process, it’s very, very important for us to think about how leverage has played out throughout the process.

That positioning, mating dance, right? So we brought a lot of acquirers in, which gave you optionality, right? You were the dude with all the chicks after you. It allowed you to really bid up the price of your business. And we demonstrated that, right? We demonstrated to the acquirers that they had a lot of competition, and they were not pay to play.

We concealed information throughout. You did a fantastic job on those management meetings. You were fun, you were playful, you were passionate about your business, you asked some great questions, you didn’t pontificate, you did exactly what you were supposed to do, and all the acquirers loved you. Great job.

You concealed information, right? You didn’t talk about your wants, needs, desires. You were focused on them, and you extracted as much information as possible. And by doing that, you allowed me to really understand how much value these guys are going to be creating by doing the deal, which allowed me to push really, really, really hard when they were raising their bids.

Somebody comes back with a 50 million bid, I was like, “Hey, listen, you’re creating a lot of value here. You know, it’s going to take you at least 60 to get to the next round. You know, that 50 is just not going to cut it.” But you helped me do that, because you played your cards right, and you did the right thing in the management meeting.

We’ve remained very credible throughout this process. We’ve remained credible, and we’ve done that because we haven’t had to really negotiate yet, right? We have let the process negotiate for us. I haven’t had to have any direct negotiations with any of those acquirers. You’ve done a great job dealing with the management meeting.

You’ve been cool and detached. You haven’t gotten upset. You saw some low offers, you didn’t get frustrated. You’re like, “This is how it works. So I’m going to trust the process and let this happen.” So right now, because we’re not doing any direct negotiation, all of that negotiation has been on the other side of the table.

Those acquirers competing. And when negotiation takes place on the other side of the table, amongst themselves, we are running an auction. But now, as we start to get towards the meeting of the minds, it’s when we sign a letter of intent. That’s when leverage can abruptly shift from our side of the table.

The second that we sign a letter of intent, we’re not binding ourselves to doing a deal with an acquirer. If the LOI is appropriately structured, really what it does is it binds us into confidentiality, right? We can’t talk about the deal. It binds us into a period of exclusivity. And exclusivity means that the acquirer will have sole and exclusive access to data, finances, resources of the company, to do their final assessment while they’re drafting a purchase agreement prior to the close. And as part of that exclusive agreement, that means we have a no-shop provision. That means we cannot talk to other acquirers, right? We can’t say anything to them. And a lot of times, a buyer will want — like, if another acquirer comes to us in an exclusivity period, that we actually have to notify them.

Like, “Hey, a buyer showed up at our door and wants to talk.” So we lose a lot of leverage when we get into exclusivity, because we lose one of the most important aspects of leverage, which is competition. Because once we sign that LOI, those other buyers are gone. We tell them, “Hey, we just signed, we just got into exclusivity with an acquirer.

Thanks for playing. You didn’t make the deal.” Now, the ability to enter into exclusivity is powerful for us, because they know we’re going to enter into exclusivity with somebody, and we want that to be them. So we want them to really put their best foot forward and pay a lot of money for this business so they can win exclusivity.

But at some point, one party is going to get it. So given the fact that leverage will shift dramatically once we get into exclusivity, we have to make sure that we’ve really thought about all the things that are important to us in this deal, and we get them in the letter of intent. So throughout this whole process of dealing with iterative bids, going to management meetings, answering questions — we’ve been having conversations over the last few weeks and really looking at all the other letters of intent. And every time we’ve gone through a bid process, or an iterative bid round, we’re making comments on the letter of intent, saying, “Hey, Acquirer A, you know, the lease term should be five years and not three.” And “Hey, Acquirer B, you know, we’re not willing to sell this.

This is an excluded asset.” So we’re revising these LOIs as we go through this process. But now, when the rubber meets the road, we need to make sure that we’re really thinking ahead to the asset purchase agreement, or the stock purchase agreement. And that definitive agreement is actually the binding document that we would sign sometime prior to the closing, or at the closing, and then money will change hands.

And then once money changes hands, the deal is bound. You don’t own the business anymore. So it’s important for somebody like me, as well as your legal counsel, to make sure you start to understand what sort of provisions will be in a definitive purchase agreement as we’re going through this negotiation process to get to the letter of intent.

There’s things like reps and warranties and indemnifications, caps and baskets. There’s a variety of legal aspects that will actually make a difference in your life post-closing that we need to make sure that we ask for at the LOI stage. And I’ll do some subsequent sessions on some of those key points so you could be better prepared for that. But for our purposes right now, since I’m focusing on negotiation and these dynamics, it’s really important to make sure that we ask for and get everything that we possibly can prior to signing the LOI. Because at that point we lose leverage. In this particular case, let’s say that the five bidders actually stayed in, and we ended up signing an LOI with one of them. That would be not common, that all five would stay to the very end, but I want to make this super easy.

So five stayed in. So we’re telling four, “Thanks. Decided to move forward with another party. Thank you for participating. See you on the next one.” Those four go on their way, and now we have to make sure that this acquirer closes this transaction. And we’re going to be in a different phase of negotiation.

Now, up until this point, we haven’t had to do a lot of direct negotiation, right? We’ve let the process negotiate for us. I’ve never had to call up and fight about terms. I just say, “Hey, listen, you do this or you don’t. If you do this, you stay in the process. If you don’t, bye-bye.” Now, once we sign the LOI, it’s not that easy, right?

And I can’t say bye-bye, because we can’t talk to any other buyers, and we’re under exclusivity for the next 60 days. So we can’t threaten to walk away. We’re already in this. Now, we can walk away if those guys are belligerent, or we decide we don’t want to do the deal, but it’s not a negotiating tactic.

So we have to think about the psychology of negotiating once we’re under exclusivity, which is very different, because now we’re negotiating directly with that one party. And inevitably, there’s going to be terms that will need to be negotiated. And this is where judgment is extremely important. This is where the credibility that we’ve built up through the entire process will bode well for us.

The information that we’ve gathered, the competitive pressure that we’ve put on — and if we’ve done a great job, we’ve probably put together a deal that’s extremely expensive for the buyer. And so, like, it’s not unusual for the buyer to be like, “I’m paying a lot of money for this business, so now I show how I’m going to make sure I’m protecting this legal document.”

And if we haven’t thought through that at the LOI stage and gotten as much of that as we can in the LOI, as soon as we sign it, the buyer’s going to say, “Hey, I’m paying a lot of money, so there’s going to be a lot on the line for you.” So we need to make sure that we’ve talked about escrows, right? A lot of times acquirers will offer 20 million for a business.

It might be all cash at the closing, and we structured the deal, we signed the LOI, and then we get into the purchase agreement negotiation phase. And somebody says, “Yeah, we need a 2 million escrow.” That wasn’t in the LOI. Well, the LOI was signed on that, but that’s standard practice. And so now we’re negotiating escrows, right?

And so we need to make sure that in the LOI we specifically — if it’s a 20 million all-cash deal, like, there is no escrow. And if there’s reps and warranties insurance, who’s paying for that, and how is it being split, and all those sorts of things. And I can really go down a rabbit hole on this, but there are inevitable things that will pop up that we can’t anticipate. Let’s say that you are a residential services business, and although the acquirers did a lot of work upfront prior to making offers and prior to signing the letter of intent, the acquirer whom we chose to walk down the aisle with discovered some things that increased the risk of the business, maybe customer concentration. And they figured that out with diligence after signing the LOI.

And they came back to us in good faith and said, “Hey, we have a problem here. There’s a lot of customer concentration. If this big customer leaves — we didn’t realize this before — we’re going to end up leaving a lot of money on the table. And we, in good faith, want to work with that buyer.” They might propose something like a special indemnity holdback.

They might say, “Well, post-closing, you have to retain this client or client group for a one-year period. And if you’re able to do that, then you’ll get the 2 million that I’m putting in this holdback back. We’re just going to hold your money. It’s your money, but we’re holding it. If we lose these accounts, we take this money.”

And we don’t have the ability to walk away unless we want to kill the deal, which we don’t want to kill the deal, because we just spent three months negotiating an awesome deal. But we also don’t want them to hold 2 million of our money and make it contingent upon customers that we’ll have no control over post-closing.

And so it’s about finding common ground. And that’s in some way where a lot of the cooperative aspects of negotiations come into play. The acquirer certainly doesn’t want to — and I think a lot of sellers get really frustrated, and this is where you need to remain cool and detached. In a situation like this, a seller would typically feel like this is a personal affront to them.

Like, “They waited to sign the LOI. They could have done the research before. Now we locked it up for them, and they’re trying to gun for us.” Now, it’s possible, and that does happen. But in this particular case, let’s say that’s not the case. Say they’re doing this in good faith. This is the point in time for you as the seller to remain calm, cool, and collected, and say, “Okay, we’ve got a problem that we’ve got to figure out how to solve.”

And typically — and not always, but typically — what’ll happen is the acquirer will make a proposal, and then we’ll make a counterproposal. They might say two million, and we say that’s way too much, but we’re willing to do something, because we recognize it’s a problem, and we recognize you’re operating in good faith.

So we’re willing to do 500K. And so now we’ve got that delta between 500K and 2 million. And oftentimes this is kind of a standard positional bargaining concession pattern, right, where we are going back and forth. They say 2 million, we say 500,000. They say 1.5 million, we say 750,000, right? And so we’ve demonstrated to them that we made a 500,000 movement, but we’re getting much closer to our walk-away point, so we’re going to lower the concession amount.

And usually concession amounts, as they go forward, are in smaller and smaller increments. This is another area where time matters. Time with regard to deadlines, time with regard to investment, and now time with regard to acceptance. So the initial gut reaction of a seller is like, “Fuck off. Go pound sand.

I’m not doing a deal.” But the reality is, you want to do a deal, the price is right, we do recognize that this is an issue, so let’s try to work through this. And we’re doing our positional bargaining, counteroffer, counteroffer. This is an important time for sellers to relax and slow things down.

Because, you know, I think if my VP were sitting here, he would say the most important thing that he’s ever learned from me is “do nothing.” Oftentimes as negotiators, we want to act. You as a seller are going to be under emotional duress. You’re going to want to act. Sometimes the best thing you can do is slow down.

And if you’ve got a good acquirer who’s investing a lot of money, and now they’re in diligence, and they’re spending hundreds of thousands of dollars on lawyers, on financial advisors, on accountants to go through your company, they’ve got HR experts coming in, and they’re spending a lot of money to get this deal done, they probably don’t want to walk away from it.

But they need to be able to save face. It’s really difficult for corporate guys to go back to their boss and say, “Hey, we discovered this. We should have found it earlier, but we didn’t. And we tried to work with the seller, and the seller is telling us, no way, you’re trying to screw us.” It’s not a good position to be in, because of course the boss is far away from the negotiating table, and he hasn’t invested the personal time.

He doesn’t have the relationship with the seller. It’s very easy for him to say, “Forget it. Like, if that seller wants to be hard, I guess just walk away from this deal.” So sometimes you just have to accept the offer, make your counterproposal, they’ll make another counterproposal, and then you just wait.

And you sit on it, and you relax, and you fight all your natural instincts to get your arms up in the air and fight this, and you just relax. And sometimes time does heal those wounds. Sometimes the acquirer doesn’t work, and more times than not they’ll come back and say, “Hey, I think we can make this work. If you’re willing to do X, we’ll just get this done.”

And ideally you’ll find yourself in a position that you ended up getting a better term than you otherwise would have gotten had you immediately engaged them. So there’s acceptance time. And, you know, I think it’s very important for people on the buy side to understand this, probably more so than people on the sell side.

And when you’re on the buy side, you’re often disappointing people, because sellers often want more than they should get, and that’s a fundamental rule here. It’s very rare for sellers to come in and say, “You know what, my business is — maybe it’s worth 20, but I’ll accept 10.” That doesn’t usually happen. And so oftentimes buyers are giving sellers offers.

If you imagine yourself in a direct negotiation with somebody, you’re trying to buy his business, and you look objectively at the business and you say to yourself, “Okay, it’s worth 2 million bucks.” The question you always have is, who makes the offer first? Is it the seller needs to put an asking price on it?

If you, the buyer — do you make the first offer? How do you handle that? And, you know, in those particular cases, I often say, whoever has the most information and has the most knowledge about the business, who’s more of a specialist in that particular asset class, you’d go first with an offer. Because if you listen to a crazy seller who’s not particularly sophisticated, they’re going to start throwing some crazy numbers around, and you’re going to end up — look, you’ve got a 2 million business. He wants — his asking price is 5 million. Well, now you’re negotiating off his 5 million asking price. So even 2 million, which you think is reasonable, is going to sound ridiculous to him. When I talk about acceptance time, it’s about you as the buyer taking control of the process, right?

As a buyer on the sell side, I’m always trying to control process. I’m negotiating process rules, I’m trying to control process. When you’re a buyer, you want to take control. And you step in, you make that unilateral bid or proposal to buy the business, and, you know, let’s say that you’d reasonably expect to pay 2 million for it.

You know, you might come in at 1.5. Something to not insult him, but also give yourself plenty of room to negotiate up to that 2 million. And why I say acceptance time is, in his mind, he wants 5 million bucks for that. He’s not going to accept that overnight, right? He’s going to unilaterally reject your proposal and say, “Hey, I’m not even willing to talk to you. When you’re serious, let’s sit down and talk. But 1.5 is ridiculous.” It might take him a week, it might take him a month, it might take him six months to realize that he needs to — whenever we get bad news, whenever we get news that is dramatically different than our expectations, we don’t immediately accept it, right?

We have to sit back and process it, and it takes time. And I feel like sometimes buyers really end up working themselves out of a deal when they don’t understand acceptance time. And so I know this is a sell-side discussion, and this was a little aside for you, but it’s an important aspect, acceptance time. But the other side, accept the situation as to where they are, let them understand what could potentially happen going forward if they don’t see things the way that you do, and then sit back and wait.

The most important thing that you can always do as a seller is control that process. You control the deadlines, you control the timeline, you have the ability to speed things up, but you also have the ability to slow things down. And remember, exclusivity — if you’ve negotiated the LOI correctly, exclusivity does not last in perpetuity.

So you might have signed up for 60 days of exclusivity. The buyer comes to you and says, “Hey, I want this two million dollar escrow.” You don’t want to do it. You can let the shot clock run out, right? That exclusivity will expire. “We’re spending a lot of money. It’ll expire in 60 days. You can go out and talk to other acquirers.”

You can go back to everyone that you talked to before and say, “Hey, it didn’t work out with that buyer. I’d like to do business with you now.” You’re not putting them in a position of strength, right? Now you’re demonstrating desire to do a deal with them. So I don’t know that I would suspect that you would get the exact same price and terms as they had offered you before.

It’s possible, sometimes, if they still really want to do the deal, but it’s not always the case. Just remember acceptance tactics. Now that we’ve talked about the formal sell-side process and the right things to do, I want to spend a little bit of time on the wrong things to do. One of the biggest mistakes that I see sellers make is negotiating with one buyer.

And that’s wrong for a variety of reasons. First off, as we know, if you’ve got one buyer, there’s no competition. So the buyer has no reason to act, because it’s usually loss aversion that makes people act. So the buyer has no reason to act. You’ve ceded control of the process to the buyer. If you’re only negotiating with one buyer, the buyer now is negotiating process as well as substance, and the buyer is controlling that process.

So you’re ceding leverage to the buyer. I think another one that folks often don’t think about, though, is the failure to get price discovery. You know, competition clearly pushes up the value of an asset. But when you negotiate with one buyer and you consummate a transaction, after the deal’s done, can you really look back and say, “I did the best for myself”?

You know, if you brought in no other buyers, knowing that valuation is subjective, right? It is arrived at at the bargaining table. There’s no price tag on a business. So if you negotiate with only one buyer, and then find yourself in a position where you closed a transaction and brought no other acquirers in, you never got price discovery. And it’s one of the biggest regrets that I hear from people after having sold a business — negotiating with the private equity firm that just called them up out of the blue and said, “We’re the best buyer and we’ll pay you the most.” Is, “Did I really do the right thing?” And you know, those sellers over time want to somewhat close their ears to the transaction multiples they hear that others are getting, because their deal is already done.

But again, if you want to do the best thing for yourself, at bare minimum, if you don’t run a formal process, if you ignore everything else that I say, bring competition into the mix. That’s number one. Another big mistake sellers make is going into this without a plan, right? If you’re going to sell your business, you need to spend time up front, hire experts, figure out what some reasonable expectations are. Because, you know, pain really comes from that gap between expectations and reality. If you walk into this with expectations that are far above what you’re ultimately going to get, it will be a painful process for you. So formulate a plan before you wade into the market. Set your reasonable expectations. Build competition for your business. Use time and deadlines as leverage.

Ferret out information on the other side. It helps you understand the disparity of desire. Conceal information that potentially exerts negative leverage on you. Build credibility over time by doing what you said you would do, and properly giving positive and negative feedback to the other side. If you can do these things, all else being equal, I promise you, you will raise the value of your business.

The biggest mistake that you can make as a seller is negotiating directly with one buyer. When you negotiate directly with one buyer, you’re effectively ceding the process, or control of the process, to the buyer. The buyer’s setting the rules. The buyer has no reason to act in absence of competition.

The buyer has no reason to do anything at all, so they can drag you out. And I think, sometimes most importantly, what people don’t think about is that if you don’t run a formal process and bring in competition, you’ll never really know how much money you left on the table. Now, certainly there are instances where you can negotiate with one buyer, get a blockbuster deal, and would not have done better elsewhere.

But I find that happens in the extreme minority of cases. Remember, the value of a business — there’s no price tag on a business. It’s arrived at at the bargaining table. Value is subjective. It’s a matter of bringing in a wide diversity of acquirers and having them bid competitively to acquire your business.

For my fellow M&A professionals out there today, I hope you picked up something to tighten your game. And for you business owners, you got a little taste of some of the complexities involved in a formal sell-side process. It’s not easy. It’s not like selling a piece of property or some old house. I wouldn’t have a job. But here at Potomac, there’s nothing we love doing more, and we kill it for our clients.

We do over a billion dollars in transaction volume per year. In fact, we did about 700 million in transaction volume in the last 60 days. We’re extremely active across the services space, and we’d love to begin having a discussion with you today in order to get you set up and ready for when it’s time for you to pull the trigger.

In fact, the majority of our clients come to us years in advance, and they value our advice as they scale their business and prepare for an exit. Reach out to us today. I’d love to have a chat with you about your business and particular circumstances, and I’ll show you exactly how you can reap the rewards of a formal sell-side process.

Again, I’m Paul Giannamore, and thank you for spending time with me today.