The motivated seller
A searcher once came to me for advice on a very attractive deal that looked to be entering its final stages – but with a potential seller whose intentions were slightly too opaque for comfort. Yes, he was at retirement age, which is typically a great first indicator of real motivation to sell, but not quite sufficient. The seller had indicated his plans to sell the business within the next couple of years so that he could retire, travel and not worry about it for the rest of retirement. And so the deal progressed.
When the searcher finally got hold of the company’s financials, she found out the seller had adjusted the EBITDA up by adding back his salary. When the searcher probed, the seller reasoned that he wasn’t active in the business, and therefore under the leadership of the new general manager he’d hired, that salary he was drawing would technically be extraneous to the business’ normal operations.
Going back to it later with the searcher, it was clear that the seller’s justification didn’t mesh with his stated reason for selling. If indeed he wasn’t active in the business since handing operational control over to a GM, his motivation to sell made little sense; the seller theoretically already had all the time in the world for the retirement lifestyle he wanted, while earning a passive income from his business. Something didn’t quite feel right. Either there was something he wasn’t telling us, or he had no immediate need to sell, posing a threat to the progressing deal.
With the seller’s motivations in doubt, I encouraged the searcher to be direct and lay out the financial reality facing the seller:
If the deal closed, a portion of the payout would be deferred for several years.
Upon closing, the seller would forfeit the (passive?) cash flow he received from the business.
If the business continued to grow under the GM, the seller could simply sit back and wait for a few years, and then sell the business for more than he could today.
So why sell now?
This should hardly be new information to the seller, who has had ample time to consider the implications of selling. An honest conversation like this would not deter a truly motivated seller with a legitimate reason to immediately sell to the searcher. In the absence of such a driver however, and faced with the financial truths of his decision, the unmotivated seller will likely lose confidence, get cold feet and ultimately back out of the deal.
Such an ending may seem tragic to the novice searcher, but that seller was likely to back out at some point anyway. Arriving quickly at this conclusion protects the months of time, capital, and effort the searcher would have poured into the deal.
On the other hand, such a conversation may unveil the true motivations. Whether a partnership breakup, divorce, relocation, or lawsuit, understanding the true underlying motivation will give the searcher the confidence she needs to move the deal forward.
For the fresh searcher faced with an attractive deal, make this your first hurdle to cross with the owner before things get serious. Ask the potential seller, over the span of a few weeks, different versions of this question: why do you want to sell your business right now? The motivated seller will provide strong, convincing, and consistent responses. The more colorful and inconsistent the answers are, the more reason you have to doubt your seller’s commitment to sell his business, and the integrity of the deal.
I emphasize the importance of engaging in these honest conversations with the seller, and with yourself right at the beginning, as hard and painful as it may be. If you aren’t convinced of the seller’s reason to sell, walk the other way. And it’s ten times easier to do so when you have an active pipeline with ten other potentially promising opportunities lined up for you to pursue instead. Searchers often make the mistake of letting their pipeline dry up in favor of that one deal (why this is a fatal mistake is a whole other story), making it extra difficult to walk away from an iffy deal. But if inertia is the reason you stick with it anyway, then the deal is already as good as dead in the water.
Epilogue
The searcher did end up walking away from the deal, but not for the reasons you might expect. In the end, the seller’s son expressed an interest in taking over the business, so discussions with the searcher came to a natural conclusion. Here lies another lesson for the prospective searcher. In preliminary conversations, underlying motivations matter but so does the obvious – check if the seller has any family members willing and able to take over the business. If so, there adds another layer of motivation to vet thoroughly – whether the seller has considered this potential successor and why the latter has not come through. If that family member makes a surprise appearance later on, your months of negotiations are all for naught.
