All right, we’ve got a lot of questions over the last month or so, and as promised, I’m here to answer as many of those as I can, so I’ll just dive right into it. First one: the PE firm just retraded on me. They dropped valuation $5 million in diligence. Should I walk, renegotiate, or call their bluff? Now, this can happen, and if you’re under exclusivity, you’ve already given away your most important piece of leverage, which is competition.

It doesn’t mean you’re powerless, it just means that things are a little bit different now, ’cause you’re under exclusivity. So the standard course of action here would be to slow it down. Folks that get retraded on typically want to react, and I think the best course of action is to do the opposite.

Slow this thing down. Be calm, cool, and collected. Let the buyer feel the pain of breaking trust now. They’re either retrading for a valid reason or an invalid reason. And here’s what I mean by that. You mentioned they dropped valuation in diligence. So if they dropped valuation in diligence, it’s possible they found something that would require them to retrade.

Maybe you misstated your numbers up front. Maybe they identified some risk in DD that wasn’t apparent to them when they signed the LOI. But if there’s a valid reason, then you’re potentially going to have to adjust if you want to do a deal with them. But if you don’t believe it’s a valid reason, and you think they’re messing around with you, then the best course of action here is to slow it down, remain calm, cool, and collected.

And if all else fails, take the business back out to market. Now, that’s how I would typically answer that question generically. In this particular case, though, I didn’t answer this exact question in this manner. I actually said, call me. This was a question I received on LinkedIn, and I said, call me. And I had a chat with the seller.

And as it turns out, the retrade was likely for an invalid reason. It was a price grab on behalf of the private equity firm. I got to chatting with the owner, who was very interested in doing a transaction, and he’d watched some of the videos here and asked me a lot of questions, and I was happy to chat with him.

Ultimately, when we took a look at his numbers, I believe that the private equity firm not only was trying to retrade by 5 million bucks, but they were probably about $10 million off in total value. So, in this particular case, the seller allowed exclusivity to lapse. He suggested that he remain calm, cool, and collected.

Don’t react, don’t do anything. Just let the shock clock run out, which is what he did. He’s now out of exclusivity and has the ability to go back out into the market. The private equity firm has already spent a lot of money. I haven’t had a conversation with the private equity firm yet, but what I likely see happening is this.

Now that he’s got an advisor who’s going to run a formal process — he didn’t do that. He received an email from a buy-side broker saying that we have a firm that’s interested in buying businesses in your industry, in your geography. The buy-side broker set him up with the private equity firm. He spent a few months talking to the private equity firm.

They put an offer on the table. Next thing you know, he finds himself in diligence, super excited to get a deal done. Then they somewhat jerk him around. He didn’t get full price discovery. He didn’t run a competitive process. He actually is leaving money on the table, and he now realizes it. So hopefully at some point later this year, I’ll be able to tell you a success story.

Of a private equity firm attempting to retrade by $5 million, ultimately getting knocked out of a process, and a seller turning around and ending up getting an additional $10 million for his business, as he should have from the beginning. Next question. They want me to roll 20% into preferred shares, but they won’t share the details until later.

Is this normal? It’s not. You’re not rolling equity here, you’re rolling the dice. You need to clearly understand from the upfront, am I rolling into common or preferred? Is there a liquidation preference? Are there any ratchets that kick in? What’s the control structure look like post-close? These questions should be very clear, and the private equity firm should be very willing — in fact, excited — to talk to you about it.

And if they’re not, they’re either hiding something, or they’re amateurs. Never enter into an LOI unless you understand those things, because that’s not a partnership. That’s blind trust. Next question. We agreed on an LOI, and now they want an additional 90 days of exclusivity and are dragging their feet.

What do I do now? It’s hard to answer this question without understanding the full context of the transaction, but it goes to show you how important a letter of intent is. The letter of intent lays out the exclusivity terms. Now, it could be that the buyer is diligently working towards getting a transaction done, and they just need more time.

They might need some approvals from a regulatory agency, or there’s a variety of things which would require the extension of exclusivity, and I see it happen multiple times per year. It’s typically not 90 days. Typically it’s, hey, we need another week or two weeks, or we need 30 days because something’s not going right.

With HSR review, or Hart-Scott-Rodino antitrust review, there’s a variety of reasons why a buyer would want exclusivity to be extended — maybe dealing with a funding source, right? A lender. There’s a lot of reasons. When you add dragging their feet in there, yeah, I don’t really know what’s going on behind the scenes, but some ways to handle that is you can negotiate mutual walkaways, right?

So if you’re not happy, if they’re dragging their feet and you’re in exclusivity, there might be a walkaway provision in there. You can tie exclusivity to specific milestones, so it puts them in a position where they’re not dragging their feet. You would have drop-dead dates, like you need to do X, Y, and Z by such and such a date.

If you don’t do that, we’re free to walk away. My exclusivity is terminated. The rule that I follow personally is don’t give exclusivity to buyers who haven’t earned it. They need to earn it on the upfront with their offer, right? That’s how they’ve earned the opportunity to get the exclusivity. They’ve built trust, they’ve done all the right things, they’ve put the right offer on the table, you’ve vetted them.

They’ve earned that exclusivity. Now, as the diligence period progresses, or as the exclusivity period progresses, and there’s a need for an extension, the buyer has to have earned that extension. They have to be moving in good faith, being able to demonstrate to you that they’re moving in good faith, in order for you to extend exclusivity. That puts you in a position where they’re not dragging.

So again, buyers get exclusivity, but only give exclusivity to buyers who’ve earned it. Next question.

Ooh, this is always an interesting one. Another buyer has surfaced after I signed an LOI. Can I talk to them? No. You can talk to them if your LOI does not have a no-shop provision, although almost all LOIs will have a no-shop. There’s an exclusivity period. So in a letter of intent, a buyer’s going to spend a lot of money on due diligence, hiring advisors, dealing with lenders, flying around.

There’s a lot of costs in terms of time and resources and money to go into doing a deal. So any buyer who’s really going to dig in is going to want exclusivity. And by definition, exclusivity means you cannot talk to other buyers. In fact, it’s likely prohibited directly and explicitly in the LOI.

And if you start talking to other buyers during an exclusivity period, it can really open you up for liability. I mean, for example, if I’m a buyer and I just spent $500,000 on diligence in your business — I’ve got my EY accounting guys, I’ve got my lawyers, I’ve got environmental consultants, I’ve got all these people, I’m spending money left and right, and I’m driving towards a transaction.

And another buyer comes out of the blue, you get an email or a phone call, and you start wheeling and dealing with another buyer who says, I’m going to pay you a little bit more money than the money you have on the table. Now, that might be enticing to you, but now I have sustained losses. You’ve agreed with me to be exclusive.

You’ve violated that. I have sustained losses, and I knew the seller, potentially liable for that depending upon the jurisdiction in which you reside. So keep in mind, the LOI is a power document. It is not a placeholder. And if you want the ability to shop a deal post signing an LOI, you need to really make sure that there is a Go Shop provision in there, or at least the absence of a no-shop provision.

I’ve been dealing with a private equity firm that I really like, but I’m not sure I want a boss. How do I define my role now? Now, I don’t know where this individual is in the deal process, but assuming a letter of intent has not been signed: do you want to figure out role, title, governance, comp, rights — the whole nine yards — prior to the transaction?

Like, when you sell a business to private equity, typically, if you’re rolling equity, you’re not selling the business and staying on, you’re entering into a partnership. So most private equity firms are going to want to get that out of the way upfront themselves. They’re going to want to say, here’s your role, here’s your comp, here’s the board structure, so on and so forth.

I always say if they’re not open with that sort of stuff, they’re either hiding something or they’re amateurs. But in this case, you might not necessarily be asking the right question. So you need to define your role, and you should define it right now, and you should understand how much control you have over the board going forward, because if you don’t, you might find yourself in a position where you really don’t like your life.

Close, closing. Last year I was dealing with a private equity firm that I didn’t move forward with. I felt uncomfortable because they asked me to roll equity in order to align incentives, but the terms were vague. What should I have expected? Well, you know, when you think about it, alignment without total transparency is manipulation, to a certain degree.

And I think what you have to ask for is the cap table. So, what’s the cap table of NewCo look like? What’s the waterfall of the proceeds going to look like when there’s a payout? Questions like, will your equity be diluted by management, understanding what they’re going to do from an acquisition perspective going forward?

You really need to ask these sorts of questions upfront. Oftentimes, I find that sellers find these terms to be vague just because they’re not used to dealing with them. Now, if you’ve got a private equity firm that’s saying, hey, don’t worry, we’ll take care of it, just roll this equity, roll 20%, you’ll get paid.

It’s fine. It’s a serious problem. But more times than not — I mean, in my experience — private equity firms are super excited to say, hey, this is the cap table, this is what this looks like, this is how you would or wouldn’t be diluted. They want to have that alignment, because no one wants to have these sorts of problems post-closing.

The continuation of that question was, they said they would like for me to be CEO after the deal, but I won’t control the board. Should I care? Well, I mean, your title means absolutely nothing, right? So, just because you’re CEO — you know, a CEO under kind of standard board governance means the CEO reports to the board of directors.

And if the board of directors has hiring and firing decisions, they can fire you. So you can be CEO. I think what you need to really understand is, who controls the board? Who controls the budget? Who controls the comp? Who sits on the board, right? Do you have veto rights? There’s a lot of things that go into understanding how much control you’ll have post-closing.

Now, from earlier in your question, you said they wanted you to roll equity, but they were vague. Then they want you to stay on as CEO. Let’s say you won’t control the board. I would say that that’s pretty standard, that you’re not going to control the board, depending upon how much equity they’re going to actually own with the business.

To me, it sounds like this is a control purchase by a private equity firm, meaning they’ll control the board numerically. You know, a quick rule of thumb here is, it’s like, if you want to stay, you structure it; if you want to go, you price it. Meaning, if you want to stay, you really need to think about board governance.

You really need to think about the comp structure. You really need to think about the alignments with the rollover equity and so forth. And if you don’t, you just price the deal to be out the door. This next question is from an attorney, who said he’s really enjoyed our videos, and he said, how do I tell if a buyer is really serious or just wasting time?

He goes on to talk about, over the years, he’s had a lot of clients that have dealt with buyers that just tend to be time wasters. And for me, this goes back to what I discussed in the psychology behind selling a business, which is the investment principle. Right? Is a buyer investing? Have they flown in? Are they spending money on dinners?

Are they hiring outside advisors? Have they put together real IOIs and LOIs? Like, what sort of investment of tying up money and effort is a buyer doing? Because anyone — you know, I can give my 12-year-old niece a crayon and a piece of paper, and she can put together an LOI, she can take a picture of it on her iPhone.

Email it off to a seller and say, hey, here’s an offer on your business, right? I mean, that’s how easy it is — this, a non-binding offer. Seriously. So I wouldn’t say she’s particularly serious about a $50 million acquisition. And I also don’t see her getting on a plane and flying in, indicting you. But if there is a sophisticated buyer, or any buyer, who is putting an offer down, spending money — again.

Flying in, flying out, flying you in, spending a lot of time, money, and effort — that effort shows that they’re serious, because people don’t do that when they’re not serious. People do what my 12-year-old niece would do, which is take a picture of an LOI and send it off. So I think those are pretty good proxies for whether or not they’re serious.

It’s like, if they haven’t spent money, they haven’t really made a commitment, you know? This next question — I was pretty certain somebody was messing with me, and I actually hope that they are, because when I read it to you, you’ll instantly know how I feel about it. Paul, should I really talk to multiple buyers, or can I just go exclusively with the one that I like the best? Now.

I feel like sometimes I’m a broken record when I talk about running tight, quiet, confidential processes. I don’t imagine a scenario where anyone should just pick the buyer that they’d like to go exclusive with. And like I just said a few minutes ago, buyers have to earn exclusivity. Giving somebody exclusivity, you’re trading something of value. You don’t give that away for free, right?

They have to earn that, and the best way to earn that is to make them compete for it. Now, there is a world — and I have seen it — where preemptive offers come in that make you say, hmm, it’s not worth going to process. These do happen. They happen, but they are rare. Usually you have to make them — I mean, 99 times out of a hundred, probably more than that.

You have to make them fight for it. So I can’t imagine a scenario — I guess, if this actually is a real question — where I would answer you, yeah, just choose the one you like, give it to ’em for free, don’t make ’em compete, who cares? I don’t know what else to say. This next question is from one of our young, budding junior deal makers who has sent me a ton of questions.

On LinkedIn. And I do appreciate your questions, and I told you I would answer as many of those as I can on Q and A sessions, ’cause I think other people would benefit from them. And I don’t have time to respond individually to all the messages I get on LinkedIn, but I do appreciate them, so thank you.

What are the most common emotional traps for sellers? Now, I had to think about this for a second, because there are scores of emotional traps for sellers. And I can go on and on. And as a matter of fact, one of these days I will go on and on — I’m going to film a two-hour session on all these emotional traps for sellers.

But I would say probably the one that just hit me right off the bat when I thought about it was the act of falling in love with the buyer too early, right? They idealize their relationship with one particular buyer at the expense of all other buyers. In their mind, they bought the second home, they’re buying the boat.

They just get too deep in love with one particular buyer who dotes on them and is super sweet to them, and they think this is the perfect home for my business, they’re going to pay good money for it, and I have eyes for no one else. That’s probably the most common emotional trap. It might not be the most dangerous emotional trap, but it’s certainly a common one.

I see it all the time, and it’s my job — and now, junior deal maker here, it is your job — to protect your clients and inoculate them from feeling that emotional rush. This next question is an interesting one, and I actually really appreciated it. It says, Paul, how do you keep your clients from overreacting when a buyer lowballs them?

And I think buyers lowball for a variety of reasons, right? So one reason a buyer might lowball is that’s really what they think it’s worth, right? So it’s not really a lowball. That’s a legitimate business decision, that that’s what this business is worth to us, that’s what we’re about to pay. Another reason, if it’s a legitimate lowball, might be that they lack information, right?

So if a buyer is in a position to make an offer, they might not understand the industry, or the fundamentals, or the dynamics, or the comparable acquisition statistics in a particular space. And so it might just be that they lack information. It could be that they’re signaling weakness, right?

That’s one option. Another one is, like, they’re testing you, right? They’re trying to figure out if they’re the only game in town. Because how you react to a lowball sends information, right? The lowball offer in and of itself sends information. Now, in a vacuum, we don’t know what that information is, right?

I don’t know if that’s really all the money the buyer has. I don’t know if the buyer just doesn’t have enough data to make an appropriate offer. I don’t know if the buyer’s tested the market. But what I do know is, it’s one of those sorts of things, and so I have to infer from a variety of other activities what that lowball offer is telling me.

Now, on the other side of the table, the buyer’s trying to understand how you’re going to react to that, and what sort of information you’re going to convey, right? And so I always tell all of my clients, and folks who aren’t my clients — and now I’m telling you — that when you get a lowball offer, silence. Each, power in this particular case, and calm, is leverage.

You want to naturally react to a lowball — do the opposite. Don’t react to it. Be silent. Be very calm, cool, and collected. Make the other side wonder. If you don’t react to a lowball offer, it’s not going to put you on tilt, it’s not going to throw you off. I would say, just practice calmness. This next question actually comes from a current client.

He’s a guy who I’ve known for eight years. I think very, very highly of him. He’s a brilliant businessman, he’s built a great business, and he said to me, Paul, why do I feel the need to win this negotiation even though I like the buyer? Why do I feel like I have to power through and win at every — okay.

And a lot of this, I think, comes down to the fact that his identity is on the line. You know, a lot of guys, their identity is tied to the business, and founders are used to being in control, and now in an M&A deal, they’re being judged, they’re being dissected, they’re being measured. And I think it’s very, very difficult.

And I always say, it’s obviously important to get the absolute most you can from a transaction, but you know, you’re not trying to dominate in a negotiation. Really, what you’re trying to do is design a future that you really want to live in. So you don’t have to win every single point. And you need to be very self-aware and ask yourself, when am I trying to win just for winning’s sake?

And when is this getting in the way of my best interest for the future that I’m trying to design for my family, myself? That’s what I think it is, in my show. You know, in closing, that same client asked me — and he has a lot of great questions — he said, how do I protect myself from getting emotionally attached to the outcome?

So he’s dealing with, like, he’s got to win at every turn, and always being dissected on the deal, but he’s focused on this outcome, right? So he gets attached to it. And usually, when clients have this sort of feeling, I’m always like, you know what? Detach from the outcome, but attach to the process. So, James Clear wrote that book, Atomic Habits, and he talked about, you know, if you want to lose weight, you can say, you know, 90 days from now I’m going to lose, like, five kilos, or make up whatever the number is.

And when you’re always focused on that particular goal and the outcome, you’re actually not focused on the process itself. And the process is like, I’ve got to get up and eat a healthy breakfast, I have to get up and go to the gym, I have to do all these sorts of things. And a sell-side process is very much like that.

You can attach to the process and make sure that you’re doing everything correctly, or the best way, in the process, and then the outcome will kind of take care of itself. If you’ve got a good business, and you’re in a good market, and you run a tight process, then if you follow that script — being attached to the process, making sure you’re doing the process right, don’t get skewed, or don’t get pushed away from it, don’t get attached to somebody else.

Don’t get emotionally involved with a buyer. Just focus on the process. Let the process do what it’s supposed to do. That outcome will take care of itself. Thank you for joining me today. I appreciate the comments on YouTube. I appreciate the messages that I get on LinkedIn. If you’re new to the channel, please like and subscribe, and feel free to leave a question below.

I’m Paul Giannamore, and I’ll see you on the next one.