Becoming a Better Business Broker Day 23: Overcoming Deal Barriers

Welcome back to Becoming a Better Business Broker in 30 Days!

This concise series title describes exactly what we hope you get out it - becoming a broker that can close more deals with less work.

Before we get started, we would be remiss to remind you to read yesterday's article, The Psychology of Selling.

Mike Lenz, a Partner at Chinook Business Advisory, often reminds our team (amid a difficult deal) that, "Every deal must first die 3 deaths."

While this isn't ideal for our collective blood pressure readings, it's true. As we covered yesterday, business deals are often very emotional for both Buyer & Seller - putting the deal in a constant state of spontaneous combustion.

As a part of Becoming a Better Broker, we need to anticipate these deal barriers (as best we can) and then use creative problem-solving skills to overcome them.

Today, we'll cover the most common deal barriers and how to overcome them:

Barrier 1: Valuation Discrepancies

As we covered in Day 2 one of the most common hurdles is the gap between what the Seller thinks their business is worth and what the Buyer is willing to pay.

Solution:

1. First, make sure to only take on listings where you're confident you can defend the valuation in the open market.
2. Next, employ a transparent valuation process, involving both Buyer and Seller in understanding how the valuation was reached. Utilize DealBuilder to pull comparable sales, find industry multiples, and build financial forecasts to present key metrics like ROIC and Debt Service Coverage Ratios (DSCR) to the Buyer and Banker.
3. Finally, if a gap still exists, incorporate the unorthodox deal-making strategies covered in Day 20.

Barrier 2: Financing Hurdles

Often, a deal stalls because the Buyer struggles to secure financing.

Solution:

1. Again, preparation is your best friend to avoid this problem. Send your Deal Teaser (with financials) to Bankers before listing on the marketplace. At a very minimum, this will tell you whether the deal is eligible for SBA or bank financing and how much cash a Buyer needs to bring to the table. If you communicate this cash requirement to Buyers from the beginning - you reduce your chances of an unfortunate surprise.
2. What if the Buyer has sufficient cash but financing falls through for a reason outside anyone's control? It's time to get creative with financing solutions. Explore seller financing, and/or even partnerships with private investors. There are a lot of successful entrepreneurs out there who want to 'buy businesses' but will insist on having an operator or CEO in place, which is uncommon for Main Street deals. By matching these Buyers with a Buyer who is unable to secure bank financing - you can set up a win-win scenario. This underlines the importance of preparing a comprehensive CIM/CBR highlighting the business's strengths, making it easier to pitch the deal to multiple parties and investors.

Barrier 3: Due Diligence Discoveries

Uh-oh, you just learned that the General Manager (who has been with the business for the past 24 years) just announced they are going to retire 1 month after closing? Unexpected findings like this during due diligence can really throw a wrench in the deal.

Solution:

• Working off the example above - what are a few tactics for saving this deal? Perhaps it's offering the General Manager a cash bonus if they stay on for an additional 6 or 12 months after closing, helping the Buyer locate and train a new General Manager replacement.
• Similar to completing financial 'pre-diligence' on a deal (i.e. are they up-to-date on their corporate taxes), encourage Sellers to conduct a pre-sale operational due diligence. The big items: the ability to transfer the current lease, retain key employees & customers, are key customers' contracts up-to-date? Are there any pending lawsuits or liabilities that require settlement before closing?

Barrier 4: Emotional Attachments

As discussed yesterday, a Seller's emotional attachment to their businesses can lead to unrealistic expectations and cold feet.

Solution: Recognize the source of your client's emotional attachment to their business and structure your sale process to accommodate their needs. For example, if you have a Seller concerned about their staff/legacy don't try and get them to sell to a Private Equity firm known for 'cutting fat' off a business to squeeze every ounce of profit out of the opportunity. Not only will the deal likely never happen but lead to such a poor experience for your Seller they might fire you!

Barrier 5: Contractual and Legal Issues

Complex legal issues or contractual obligations can deter Buyers.

Solution:

• Engage legal and financial experts early in the process to review and resolve any potential legal or contractual issues. Clear, straightforward contracts and a well-documented legal framework can ease buyer concerns.
• We recently experienced this on a deal that, no matter how many minds got put together, our team could not understand how the business' revenue model worked. This was due to a complicated insurance reimbursement payment model. If this is true as a Broker (who works closest with the Seller) then the same issue will arise for Buyers. Ultimately, in the case of this business, it was so much of a barrier that Buyers couldn't proceed in the process. The solution? We took the business off the market, the business renegotiated and simplified its contracts, and now it's ready to present to Buyers in a much clearer light.

Barrier 6: Misaligned Expectations

Sometimes, the deal falters simply because the Buyer and Seller are not on the same page regarding the future of the business.

Solution:

• Circling back to our previous example about Private Equity - often new Buyer's are very optimistic about the business and are growth-minded. Sometimes this over-zealous optimism can trigger the salty Seller who thinks, "Hey punk, you don't think I've thought of doing that too?" To keep things civil - try and act as a conduit of collaboration. What does the word salad mean? Let the Seller know that the Buyer would appreciate their feedback on their growth plan, however, the Buyer has no plan to rock the boat and change the business on Day 1 - this is especially important if an earn-out or seller financing is involved (Seller doesn't want to see the business fail). Further, coach the Buyer to stay patient and not change anything about the business for the first 6 months. This will allow them to fully understand the business and (in most cases) realize their original growth plan was missing key considerations of how the business functioned.
• TLDR: Facilitate a clear dialogue about each party's vision for the business's future. Aligning expectations early can prevent misunderstandings and disputes down the line.

Conclusion: The Path Forward

Overcoming deal barriers requires a mix of anticipation, preparation, creativity, and often a lot of ... patience ??

By understanding the most common hurdles and implementing these strategies, you can navigate your deals through a rocky path and stumble your way to a successful close.

Get ready for class, as we cover Roll-over Equity 101 on Day 24 of Becoming a Better Business Broker.

If you want to learn more about automating your business brokerage with DealBuilder, please visit our site or book a demo here.