How to Deal with Inexperienced Sellers

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Mergers and acquisitions (M&A) are complex, particularly when dealing with private sellers who have little or no experience in the field. Inexperienced sellers may not fully understand the value of their company or the intricacies of the M&A process, which can lead to delays, misunderstandings, and, ultimately, failed deals.

However, with the right approach, inexperienced sellers can successfully navigate the M&A process and achieve a mutually beneficial outcome. Here are some tips for dealing with inexperienced sellers in M&A.

Clear Communication

Be transparent and clear when communicating. Inexperienced sellers may not understand the jargon and technicalities of M&A, so clearly explain the process and any relevant terms or concepts. Be upfront about the intentions of the acquisition and the potential benefits for both parties.

Sellers can easily be confused with the legal terminology surrounding different M&A documents, such as a letter of intent (LOI). Michael Frankel, Founder and Managing Partner of Trajectory Capital, likes to deliver the LOI personally so that he can walk through them in real-time. This approach will help acquirers put the seller at ease and close more deals.?

“I personally prefer to walk people through the letter of intent live. And the reason is, number one, legal language is hard to digest, and if you walk them through it live, you can tie it back to the things they’ve said. For instance, I get on a Zoom with them and explain the purchase price. Talk them through how we valued their business and why we came to this particular price point.

Walk them through, so they not only understand the terms and the logic behind them but also, sometimes, these are business people who have never done M&A before. They don't understand the legal structures, and you don't want to leave it to them and their lawyers to sort it out.”

Empathy

Be patient and understanding. Always remember that selling a business is an emotional process. The seller may take longer to make decisions or be more hesitant to agree to certain terms. The seller may need more time to fully grasp the deal's implications.

Supporting sellers through this journey with empathy will enable buyers to negotiate smoother and close the deal much faster. Especially if a seller is needed to run the business post-close. Isaac Lund shared his experience in working with private sellers:?

“In many cases, family businesses have been run for at least a generation. In some cases, we were buying businesses that have been run for 50 years under the same family name. It’s interwoven into their daily lives, every facet and every way you can imagine. And so it’s just really thinking through that and being aware.

Obviously, it comes down to reps and warranties, deal points, valuation, and integration time. All those things are important. Mitigating your risk is critical, but we're most successful long-term in terms of really creating value from a deal when we respect the fact that this is someone's baby, and during the process, we treat it as such. And even more importantly, after the deal's closed, we continue to treat it with the dignity and respect it deserves.

Most people are worried about their legacy, and being respectful of that and understanding it, being patient, and talking through some of those emotional pieces can help buyers. Especially if they're looking to keep a seller on board post-close. It can set the foundation for a lot of value creation post-close. Otherwise, it could become very contentious very quickly. They don't feel like they can trust you, and then the process breaks down in terms of even negotiating.”

Efficient Due Diligence

Private sellers are often small companies with tiny teams to support the due diligence. In most cases, the deal must be kept a secret to avoid alarming employees. Therefore, only the founder will facilitate the buying process. One of the most common mistakes buyers make is throwing five hundred questions at a seller at once.?

While templates are a good practice for serial acquirers, customizing the templates for the target company is imperative. After all, every deal is different. The best thing buyers can do is triage these questions based on priorities. According to James Harris, Principal, Corporate Development Integration at Google, diligence questions should be separated into two phases.

The first phase of the process should focus on determining whether the deal will move forward or not. And the second phase involves the integration questions and how the company will fit in with the acquirer’s company post-close. Read more about it here.

Hiring a Banker

When selling their business, inexperienced sellers may not be familiar with an M&A process and the complexities that often follow. And most of the time, due to their lack of knowledge, they do not know about the advantages of hiring an advisor or investment bank. In some cases, an investment bank can help sellers find the right buyers more effectively than they ever could on their own.?

Bankers definitely help sellers run an efficient process, organize diligence, and complete request lists much faster.?

Unfortunately for the buyer, when a bank is involved, the deal price goes up, and negotiations are harder. A bank can also always advise a seller to go into an auction process to further increase the price.

Jeremy Segal, Executive Vice President of Corporate Development at Progress, is a big believer in the value of bankers for inexperienced sellers. According to him, as long as he can guarantee exclusivity for a period of time, he suggests hiring a banker.?

“Bankers usually have a much more robust data room when you start doing diligence in a proactive process where the company isn't really teed up to sell. The information trickles down better.?

They also bring a level of experience that sometimes entrepreneurs or sellers who are newer to that process don't really know what they're doing, and so sometimes can get ahead of their skis.?

So bankers can keep them a little bit more balanced and focused on what we're trying to accomplish in the deal.

I had a situation where a company did not have a banker, and it was really difficult to negotiate with them because they had never done this before. They didn't know what they were doing. We were months down the road with this company, and they got cold feet with regard to valuation.

This is something that should be addressed early in the process when you sign an LOI and not when you're about to sign a definitive agreement. A banker wouldn't let something like that happen.”

Last Word

By following these tips, you can successfully navigate the M&A process with inexperienced sellers and achieve a mutually beneficial outcome. Remember that M&A is a process that requires patience, clear communication, and a willingness to compromise. With the right approach, you can successfully acquire a company from an inexperienced seller and realize its full potential.

However, always be willing to walk away from a deal, regardless of how much time was invested. Buyers need to always stick to the bottom line and be willing to walk away if a seller is not willing to meet appropriate terms.

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