I had the opportunity to help one of my favorite clients evaluate a potential merger with another, larger firm. After years of building his firm, he was ready to see it go to an even higher level of success with his suitor. Selling your business can be exciting times, and while this merger did not come to fruition, any proposed or actual merger can be a challenge to navigate.
In most cases the party on the others side of the table acts in good faith. However, that’s not always the case. Verne Harnish, known as the “Growth Guy”, wrote an article about games buyers play with sellers. Here is one thing he suggests to be prepared for, or what he calls a “dirty trick”.
“The buyer offers the entrepreneur an insanely large price for the business and suggests the deal can close in weeks.”
Why, you might ask? The answer is below:
To get entrepreneurs to drop their guard. Nothing builds a temporary relationship faster than offering a premium price for the business.
It also gets entrepreneurs and their spouses dreaming about the life they’ll lead after the sale – the houses, boats, and vacations – and planning for what they’ll do once they have a boatload of money.
More importantly, buyers do this to entice sellers to sign an exclusivity agreement that prevents them from talking with other potential buyers for six months during the due diligence period – which they promise will go quickly. Entrepreneurs will usually sign on the dotted line, relieved that they are going to get a great price—even if it is ultimately half of what’s offered–and not have to deal with other buyers–which is extremely time consuming. But that’s the beginning of their downfall.
Such tactics are unethical, but as each side tries to maximize or minimize the purchase price, respectively, the seller needs to be on guard. Harnish recommends that you have your CFO or another trusted advisor work with a business broker as a go-between with the buyer. It’s too big a transaction to do it on your own.