Choose Your Buyer Wisely

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When you do a deal well, then three quarters of the way into the process you have multiple offers on the table, you have mentioned an asking price to no one, none of the interested parties have yet done due diligence, and you are ready to pick a bidder with whom you want to negotiate a deal. This is not to say that any of the offers are acceptable. You assume correctly that there is always money left on the table and you are going to choose one of the parties, not necessarily the highest offer, but probably so, with whom to negotiate the final deal. After you come to terms the winning bidder will conduct its due diligence, a definitive purchase agreement will be prepared, the details will be negotiated, and the deal will be closed.

5t6r7h2lBut what should you do before you anoint the winning bidder? What could possibly go wrong when you have all the offers on the table? All of the interested parties have been on their best behavior, dressed nicely and have tried to become your best friend. But the fact is that all deals do not close, and many times the reason they don’t close is simply because the seller chose the purchaser unwisely. The seller did not do enough due diligence on the buyer to gain as much knowledge about the person or the firm as possible. You can never be sure, but you can be prudent and do a number of things to help assure success before you make that all important choice. I will name a few:

  • Spend the money and do background checks – even if you think you already know the buyer.
  • Ask for a list of deals the buyer has done and contact the sellers to see how the deals went. Did the buyer do what it said it would do? Did the seller feel as though he was treated fairly? Was the deal done within the time scheduled?
  • Ask for and check bank references.
  • Be sure you know the intended capital structure of your company after the buyer has bought you out. There will probably be equity and debt involved. As to the equity, if the buyer is a private equity group, how does it raise its capital? How many “funds” does it have? If it’s an individual buyer, ask to see his balance sheet to see how much of his total equity he is committing.
  • Ask the buyer how many of its offers have not achieved funding and why did they fail.
  • Is your buyer a “fundless sponsor” that has to go out and raise every penny of the purchase price, or does it have equity capital and only has to raise the debt?
  • Ask for names of debt and equity providers to the buyer on prior deals, and ask to talk with them about how the deals went.
  • Ask the buyer if it has checked with capital providers to see whether funds are available to do this deal prior to making the offer. Does it have money sources lined up yet, even tentatively?

45ab4511-851d-4fdf-b2e3-4d1dd22dc070Ask these and other questions to all of the top contenders before you make a choice. The risk you are trying to avoid is the buyer not being able to raise the necessary capital. If you choose the wrong one, it’s not the end of the world because one of the other bidders will undoubtedly still be interested. But you will have wasted time and caused yourself a lot of heartache.

The buyer is going to spend weeks doing due diligence on you. Spend a little time and do your diligence on him first.