Understanding How Buyers Think – Key Insights That Can Help You Sell Your Business For the Best Possible Terms

Many years ago, Sun Tzu, one of the greatest and most quoted military strategists of all time, said that one of the keys to winning any war is to “know your enemy.”  In the context of a business sale, this nugget of wisdom applies with equal force: “know your Buyer.”

Let me be more specific.  If you’re in the process right now of negotiating the sale of your business with a potential Buyer, don’t you think you’d be in a far stronger negotiating position if you knew what the Buyer really wants, what the Buyer is most concerned with, and what the “deal killer” issues are for the Buyer?  By tuning in to the Buyer’s needs, you as the Seller can both increase the likelihood that a deal will close and maximize the payout from that sale.

As a lawyer who has represented sellers in many dozens of business sales, I’ve seen this play out many times in real life.  By thinking like the Buyer, understanding that the sale process is a competitive process, and preparing for the sale process accordingly, I can tell you from lots of first-hand experience that you’ll be far better positioned to close a successful sale than you would be otherwise.

So let me illustrate this by taking a quick look at each of the three main phases of a sale transaction:

1.  Stage 1 – Term Sheet Stage.  You should understand two things about the Buyer’s mindset this early part of the transaction: the first is that the Buyer’s excitement and enthusiasm for the deal are at their high point; and the second is that the Buyer is being driven by one overarching goal – to make money.

So how should that understanding guide your actions during this early stage?  Here are a few suggestions:

  • Take advantage of the Buyer’s exuberance by seeking important, but reasonable, concessions.
  • But don’t overreach and don’t oversell at this point.  Think about it: if the Buyer feels later that you’ve taken advantage of him early on, he may walk away from the deal later after you’ve invested a lot of time and money in the sale process.
  • Build realistic expectations for the Buyer.
  • Work hard at “packaging” your business effectively so that you minimize surprises for the Buyer and so that you put your advisors in the best position to plan the rest of the sale process.

2.  Stage 2 – Due Diligence Stage.  The Buyer’s mindset at this stage can be summarized this way: I deserve to see all the documentation and information about the business that I want to see.  If the Seller is reluctant to provide what I ask for, that will be a red flag and I will react by assuming the worst.  I will assume, for valuation purposes, that the Seller’s business is “clean,” so blemishes discovered in the diligence process will drive down the purchase price I’m willing to pay.”  So knowing that, here’s some advice that should inform your actions during this due diligence stage:

  • Don’t assume the Buyer knows anything at all about your business.
  • Be forthcoming in providing complete and honest responses to the Buyer’s request for information and documents, and do not put the Buyer in the position of having to use his imagination as to why something is not being provided.
  • Organize your contracts and other documents ahead of time, so you can provide an organized set of documents to the Buyer quickly upon request.
  • Divulge weaknesses upfront.
  • Your goal at this stage should be to build the Buyer’s trust.

3.  Stage 3 – Contract Negotiation and Closing Stage.  In this final stage of the sale process, fatigue is setting in, costs are continuing to rise, everyone is feeling pressure to close the deal, and tempers may be flaring.

On top of all that, the Buyer is likely thinking some or all of the following thoughts:I’m planning to pay a lot of money for the Seller’s business, and I do not want to inherit a mess.  I’ll be far less willing to compromise on key deal points if I’m worried that the Seller is trying to stick me with a problem or liability that will cost me a lot of money after closing.  On the other hand, if I feel I can trust the Seller and the Seller has been honest, candid, and organized up to this point, I will be more willing to make concessions in the name of getting the deal closed quickly.”  Armed with that insight, here are a couple of final pieces of advice:

  • If you are in fact sticking the Buyer with a “mess” in the business, be willing to make reasonable concessions.  For example, you may have to leave behind a portion of the purchase price in an escrow account, so that the Buyer can fund any post-closing cleanup that may become necessary.
  • Try to identify what the Buyer’s “deal killer” issues might be and work proactively with your legal and business advisors to plan “work-arounds” and potential compromises.  For example, if a portion of your business includes a dozen pieces of land, and the necessary title or environmental reports for five parcels are unsatisfactory or not likely to be completed on schedule, consider proposing that those five parcels be kept out of the main closing and sold to the Buyer at a subsequent closing.

So now that you have a better understanding of your Buyer’s mindset at each stage of the sale transaction, what can you do in the next week to position your company for a more lucrative, less time consuming, and ultimately more successful sale?  Start by circling up with your legal and business advisors and mapping out a plan that takes into account what you’ve learned above about how your Buyer is thinking.

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