Managing Back Up Offers When Selling a Business: Maintaining Leverage During the Sales Process
In the world of buying and selling businesses, unpredictability is part of the mix. Small business sale transactions commonly fall through for any number of reasons. While you might not be able to prevent a transaction from coming apart, you can navigate the sale process, so you have as much leverage as possible. This is where backup offers come into play. Since selling a business can take many twists and turns, having a well-thought-out backup plan can make all the difference in ensuring a smoother and more secure transaction.
Why Business Sale Deals Fall Through
To understand how and where a deal can go south, look no further than the sale process.
Unlike a real estate transaction where the property is the main concern, the sale of a business has many moving parts. Buyers and sellers must hammer out agreements covering everything from the assets included in the sale to the contracts transferred, working capital distributed, and more.
At each step along the way, the buyer or seller can get cold feet or change their requirements, business conditions can change, or the business itself might change. Revenues might decline or increase. Key employees might leave. The landlord might raise the rent or refuse to negotiate with the buyer altogether.
Sellers must navigate these challenges and more until the deal closes, and the check is in their hands.
What Is a Backup Offer When Selling a Business?
Home sellers commonly use backup offers as buffers in case their first-choice buyer can’t or won’t close the deal. A backup offer is a legally binding document that becomes a purchase agreement if the first-in-line buyer doesn’t close the deal.
Since a business’s sale works differently from selling a home, buyers are unlikely to be willing to write backup offers. The time it typically takes to close a business sale alone would deter most buyers from accepting the contractual obligations of a backup offer.
On the other hand, sellers have a vested interest in keeping all potential buyers in play, especially because an estimated 50% of business sales fail to close. As a seller, you can take steps to keep prospects interested until you choose a buyer and sign a letter of intent (LOI).
Sellers Have More Control at the Beginning of the Business Sale Process
Sellers have the most leverage at the start of the sale process. Potential buyers know they’re competing against others, and the competition pressures them to take their best shot and make the best offer they can.
Sellers should make the most of the early stages of the sale process by:
- Designing marketing to attract as many prospective buyers as possible
- Building relationships with buyer prospects by communicating regularly
- Focusing discussions on the areas where their interests and those of the buyer align
By keeping as many buyers in play as possible, sellers can position themselves to get the most favorable terms in the LOI they ultimately sign.
Once buyers and sellers sign a LOI, the honeymoon is over, so to speak. The buyer is no longer competing with others, and any issues that crop up from this point gives the buyer an opportunity to reduce the purchase price offered.
Negotiating the No-Shop Clause
In most cases, LOIs include a “no-shop” clause, a provision that requires the seller to negotiate exclusively with the buyer for a period of time. Buyers insist on no-shop clauses because they don’t want to spend the time and money to perform due diligence and write a purchase agreement only to have a deal snatched from under them by another buyer.
A no-shop clause typically runs for 30-90 days and restricts the seller from marketing the business, continuing negotiations with any existing buyer prospects, or soliciting new prospects.
The one exception is unsolicited offers. No-shop clauses typically allow sellers to respond to unsolicited offers received during the exclusivity period.
As a seller, it’s unlikely that you can keep a no-shop clause out of an LOI, but you can build in protections that keep the provisions as unrestrictive as possible by:
- Making the exclusivity period as short as possible
- Including deadlines for milestones such as the completion of due diligence, obtaining financing commitments, drafting a purchase agreement, and the closing date
- Setting up exclusions such as unsolicited offers
Making the exclusivity period contingent on meeting the milestones is a good idea. In other words, if a deadline is missed, exclusivity ends.
Maintaining Leverage as a Seller During the Sale Process
Another tactic sellers use to help keep some leverage over the sale process is to require an “affirmative response clause.” This provision requires buyers to proactively notify sellers during predetermined periods that they don’t anticipate any material changes to the sale terms.
Sellers must also be wary of a practice known as re-trading. Buyers inflate their initial offer price only to reduce it once the sale process is well underway and competitors have been eliminated.
Building a provision that says re-trading will end the exclusivity period into the LOI can reduce the likelihood that a buyer will try this tactic (although sellers should understand that re-trading differs from a justifiable price reduction based on events that arise or information that’s uncovered).
How Business Brokers Can Help
By working with an attorney experienced in mergers and acquisitions, sellers can avoid some of the pitfalls described above. Even so, the sale process is thorny, and the need to continue focusing on running a business while negotiating its sale makes selling your business even more problematic.
Business brokers take some of the time-consuming tasks of selling a business off a seller’s plate and impact the sale process during the period that offers sellers the most leverage.
Business brokers have access to potential buyer databases, market knowledge, and marketing expertise to recruit the largest prospect pool possible and create the kind of competition that drives up the sale price.
In many cases, they can also research prospective buyers to help ensure that the one a seller chooses will be equipped and willing to close the deal.
Lastly, business brokers have access to comparable sales data and the experience needed to establish a realistic business valuation. By starting with a valuation based on reliable financial metrics and market knowledge, sellers can avoid getting too far down the road with a buyer who has no intention of following through with a high offer price.
The BizBuySell Broker Directory is a valuable resource for finding a business broker who can help you sell your business, manage offers, and ensure a successful deal.