How To Structure The Perfect Deal And Manage Seller Expectations

In this session of the inaugural EtA Forum, people from all ends of the search spectrum came together to discuss a vital, if sometimes prickly topic: how to structure the perfect deal, especially when the seller isn’t as experienced.

Often in search, the business owner is not an experienced business seller, and this can have implications in many ways. For example, they might be unaware of the critical information that the searcher will want to see in a due diligence process. Or, they may have unknowingly surrounded themselves with poor-quality advice, which can end up undermining the entire deal.

A searcher’s first job, after identifying a business that they like the look of, is trying to encourage the seller to have the best quality support and advice around them as possible. From there it will become more straightforward to negotiate and gain access to the information that they need to come to a conclusion.

 Another major point that was brought up by the panel was the need to be flexible. Through any due diligence process, there is going to be information that comes to light that is unexpected. The experienced searcher, however, approaches this with the mindset that these are hurdles, not roadblocks. There is a solution in the deal and negotiation which means that neither party needs to walk away when the unexpected is found during due diligence.

For an awesome insight into the psychology of searchers and their relationship with sellers, this panel is a must-listen!

Connect with:

Michael Chew – Flywheel Effect https://www.linkedin.com/in/michael-chew-3028b61 

Brent Goldman – Nexia Australia https://www.linkedin.com/in/brentgoldmanadviser/ 

Nima Sedaghat – HWL Ebsworth https://www.linkedin.com/in/nimasedaghat

Pete Seligman - https://www.linkedin.com/in/peteseligman/

What We Discussed:

2:44 What’s driving the headline information as a deal is being structured?

4:42 Why it is important that the vendor is getting good advice for a deal.

6:35 What are the challenges that come from unsophisticated sellers, and how do you manage those deals?

9:01 What’s the mindset of the inexperienced seller? Are they just looking for a cash price, or how else might they approach a deal?

12:33 Why it’s valuable to communicate how the deal will practically work for a seller, and building education into the process.

14:29 Why being flexible during the due diligence process is so critical.

16:34 For buyers, how does the due diligence process influence the structure of a deal?

20:40 Q & A with the audience.

26:31 Pete provides a summary and analysis of the panel’s key findings.

Quotes:

 Michael Chew: “Something that I think is common with a lot of the deals of the size that that we have is that there are relationships and other things held in with the person how you mitigate that risk.

Pete Seligman: “You've got to know how the vendor on the other side of the deal is being advised and how capable the advice is. The better the advice that the vendor is being given, the better the process is going to be. You might go in there thinking “oh, they've got crap advice, and this is going to make it really easy for me to walk all over them.” But actually, it just makes it really, really hard to structure a deal.”

Brent Goldman: “A business that doesn’t have the right financial information doesn't actually mean that it’s badly run – it may well be making money and surviving comfortably. So I would see that as an opportunity to put in some processes and systems and really drive growth.”

Nima Sedaghat: (10:59): “As a buyer, it's a worthwhile exercise to ask your advisors “what does this deal structure that we're proposing look like for the seller?” If they're expecting just to take all the cash off the table, from day one, it's important to be able to articulate why that works for them, whether that’s because they’re managing the tax timing, or if it's likely that they can access exemptions, and so on.”

Pete Seligman: “Working capital is the most misunderstood kind of function, definitely in small businesses, but plenty of larger businesses too. It's the one that sellers always misinterpret with regards to the impact that it’s going to have on cash flow and what they’re selling.”

Nima Sedaghat “You just don't know what is going to be uncovered as part of your due diligence process. You could start a deal and get through commercial due diligence and you're on to a winner, but then your accountant gets in there and discovers that the quality of earnings is nowhere near what you thought. So, you're going back to the drawing board to manage that risk.”

Pete Seligman: “When you go skiing and you’re about to hop on the chairlift, you’re going to be thinking about all the runs that you’re going to do. This is like when you're just seeing a deal for the first time. You might think to yourself that you like the business, so you “get on the chairlift” and start doing due diligence. Then you get to the top of the hill, and you can actually see the business. You have completed commercial due diligence, and you understand the business. Then you need to move into the confirmatory stuff, which is the point where you start skiing down the hill and your options start to get fewer and fewer. That’s when you need to commit – and just like skiing, once you get started you can’t half commit to a run.”

Pete Seligman: “There's no doubt you'll find all sorts of stuff. It's about saying every single thing I'm going to find is going to be a hurdle, not a roadblock. I'm going to look for things that I can do with the deal or negotiation so I can continue moving forward because I am doing this deal.”