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Time is the enemy in deal making

John Wagner

They say you should never buy clothes (especially festive shirts) on vacation that you plan to wear back home. Yes, I know, you’re strolling the beach shops and you spot that nifty little number. And even though your traveling companion says, “Are you sure you’re going to wear that once we get home?” You shake your head: “Of course I will! That party at the Davis’ last Easter, I would have worn this very shirt!”

And your partner says, “And you don’t think Mrs. Davis would be offended by all the skulls on the collar?”

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“No way,” you insist as you head to the cash register.

Of course, a week later, unpacking your bags, you pull out that skull shirt, and say, “What in the name of Jehovah was I thinking!?” Turning to your companion you say: “Why didn’t you stop me?”

Yes, you’re experiencing buyer’s regret. In the cold light of day, you look at the item and think: What came over me to pay so much for this? Why did I think this was a good fit?

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Well, this same over-enthusiasm to make a purchase, and the ensuing buyer’s regret, can also happen in deal making when you offer your business for sale, and it’s something you, as a seller, should take advantage of.

Here’s how: An acquirer spots your business, gets the deal book from your investment banker, and then—all of a sudden—there’s a rush of conference calls.

They’re thrilled you’ve come on the market! They’ve been watching you for some time; you’re a perfect fit for their portfolio!

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Site visits are hurriedly planned. When you meet, your teams get along fabulously. Turns out you know the same people, the same vendors. You all get a feeling of camaraderie when shaking hands as the visit wraps.

Sure enough, the buyer has fast-tracked a Letter of Intent (LOI), and boom, you have an offer. It’s a strong one! The team that visited your site reported back about all the synergies that are possible in a tie-up, and what the combined buying power will do for margins.

As a seller, at this point, you want to take advantage of that enthusiasm. First, don’t get cocky on the price. If the offer is strong—even if it’s not entirely what you wanted—consider accepting it.

If you go back and bog down the LOI with redline markups and request for more money, or onerous employment terms, then time is your enemy, and the buyer has a chance to rethink the offer. In the cold light of day their enthusiasm may wane, and—as days drag into weeks or even months—a few of the acquirer’s analysts may sit back and say, “Are we overpaying for that company?” Another might add: “You know, they didn’t accept our offer right away. It was a great offer! Are they really team players? Are they leveraging us against another buyer? Maybe withdraw the LOI?”

And sure enough, we’ve seen this happen, the dreaded phone call comes and the buyer says, “You know, since you have not signed that LOI yet, we are rethinking our offer. We’re going to withdraw that first LOI and offer a second one.” Think it will be a higher price? Nope. It will be lower, or propose increased seller leverage. So, when enthusiasm is running high, consider “riding the wave,” and accepting the decent (if not an absolutely 100% perfect) offer. Move expeditiously to the closing before someone says, “Are you really sure what we’re buying is a good fit?”

 

John Wagner is a managing director at 1stWest Mergers & Acquisitions, which offers a specialty practice in the LBM sector. Reach John at j.wagner@1stwestma.com

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