Multi-Unit Franchisee Magazine Issue I, 2012 | Page 74

ExitStrategies By Dean Zuccarello

Seller Beware
Look beyond price when evaluating buyers

W

hen sellers are contemplating a decision
regarding the sale of their business, they overwhelmingly select the bidder with the highest
price, only to find afterward that this might not
have been the best decision for their circumstances. Just as a financing decision is more complex than simply getting the lowest interest rate, the process of selecting the optimal buyer for
a particular transaction entails more than simply selecting the
one offering the highest price.
For business owners, the decision to sell requires careful consideration. Frequently, sellers arrive at their decision to sell after
a long and thoughtful assessment, which includes an analysis by
the seller of their personal, lifestyle, and financial considerations.
Unfortunately, after the decision to sell is made, many sellers
give considerably less thought to the buyer selection process.
The decision of whom to sell your business to is equally as important as making the decision to sell.
To avoid deal disappointment and the possibility of a substantially modified or even failed transaction, gaining a detailed understanding of the selling process is critical. A seller’s first step in
this process is to assess their own key motivations and objectives
for pursuing the transaction. Of course, a seller wants to maximize the proceeds from a transaction, but other considerations
also are critical factors, including transaction timing; the legacy
the seller leaves behind; employee protection and enrichment;
and future relationships with third parties such as franchisors,
lenders, and landlords. It is easy to make an initial buyer selection based on the highest bid because it is a quantitative measure.
However, a qualitative assessment is imperative as well.
Once a seller has identified and prioritized their own objectives, understanding the prospective buyers and assessing their
respective qualities is a critical next step. Not all buyers operate
the same way. The most professional (and often the best) acquirers
pride themselves on completing extensive due diligence to gain a
detailed understanding of the business and the seller’s objectives
from a transaction. This helps ensure a successful process and
minimizes the chances for re-pricing the transaction.
However, other potential buyers will use a strategy of submitting an offer after expending a minimum amount of effort
in assessing the deal, with the plan to invest the effort in due
diligence only after they are awarded the transaction through an
accepted Letter of Intent (LOI). Too often these types of buyers
will change their position once they gain a detailed understanding
of the business. Unfortunately, this arises only after both sides
are well into the process and have committed extensive resources
to the potential transaction.
Finally, there are those buyers who knowingly overbid the
transaction to get it “off the street,” with the intent to renegotiate afterward. This strategy attempts to capitalize on the fact
that the highest offer is often too tempting to pass up for most
sellers, and once sellers engage with this buyer, it is too late to
go back to the other potential buyers. It is not uncommon for
even the most astute business people to fall into this trap and
fail to be diligent in their assessment of the buyer.

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Multi-Unit Franchisee Is s ue I, 2012

Seller’s checklist

So, what steps can a seller take to increase the odds of a successful
outcome? First, require in-person meetings with a buyer. You and
your professionals can benefit from reading the unwritten messages in the body language of a buyer when they are presented
with pointed questions. In addition, if the buyer is willing to
travel to meet you on your home field, there is some indication
of commitment on their part, and confirmation they are serious.
Second, look at the buyer’s track record: What deals have they
successfully closed to date? Any recently? What is the buyer’s
proposed timing for the transaction? And is their “quality” as a
buyer strong enough to secure franchisor approval, lease assignments, and guaranty releases?
Third, make sure a buyer’s plan addresses factors other than
price. Putting price aside, does their plan for buying your business meet your other goals for a transaction? Do you understand
the details of your buyer’s plan? Where is their equity coming
from? Who is providing their debt financing? Has the lender
already started its underwriting? Has a commitment letter been
provided? If you are selling a franchise business, determine if the
buyer is already an approved operator in the system. Do they
have an approved operating partner and the infrastructure in
place to successfully run the business? What is the buyer’s intent
regarding your employees? What is the buyer’s relationship with
your franchisor? What is their transition plan? What is the plan
for outstanding Capex and remodel requirements?
Finally, ensure that the buyer has full disclosure up front, to
force the diligence process in advance of an LOI. As noted above,
you do not want to fall into the trap of taking your business off
the market as the result of a dazzling offer, only to be re-traded
by a buyer once they do their homework after making the offer.
Full disclosure up front also holds the seller accountable. Some
sellers may want to gloss over or even hide financial events from
the buyer, but this slippery slope plays right into a buyer’s hands,
and almost guarantees the price will be renegotiated. Damage is
done by setting f