The Least Discussed Topic in the Buy/Sell Transaction Process
The business buy/sell transaction process is a well-defined process. This process has been studied, analyzed, investigated and explained for over 30 years. Every day, experts in this field offer words of wisdom, sage advice and detailed instructions about how to avoid the pitfalls that lead to a failure to close. Daily, my email inbox receives many articles, blogs and webinars telling me the 5 things I should know or the 10 things I should avoid etc. These topics describe in detail the importance of; accurate financials, understanding balance sheets, proper due diligence and generally everything one should know, to successfully navigate the buy/sell process. Yet the statistics show, 85%-90% of the businesses listed for sale………. never sell!
My introduction to the buy/sell transaction process began when I decided to buy a business. Like most first time buyers I knew very little about “how to buy a business”. I just knew I wanted to buy. Long story short, after literally 15-20 attempts I finally found the business I wanted to buy. I was determined to buy this business regardless of any obstacles. That level of determination proved to be absolutely necessary. It was not an easy process and it was not a fun process. I eventually closed on my business. I became a business owner! Fortunately, I was quite successful operating the business. After about 6 years I sold the business. The selling process was not pleasant at all either. On the third attempt I found a buyer that was as equally determined to buy as I was to sell. Working together we closed on the transaction.
With my personal experience fresh in mind, I began my new career. I was determined to learn everything I could about how to help other buyers and sellers avoid the negative experiences I had. My first objective was to take every course available about how the buy/sell transaction should be done. I joined International Business Brokers Association (IBBA) and M&A Source organizations, partly because of the excellence of their educational programs and to be able to learn from the best-of-the-best professional Intermediaries. I earned the Certified Business Intermediary (CBI) designation and am working towards the Merger & Acquisition Master Intermediary (M&AMI) credential. With this experience and training I am convinced, if buyers, sellers and business intermediaries work together and follow the proven process for the buy/sell transaction, the previously quoted 85%-90% failure rate will drop dramatically.
The mechanics of the process are well defined and relatively easy to follow. Yet, basic human nature often gets in the way and creates chaos. This leads us to the least discussed topic in the buy/sell process, basic human psychology. The Buyer, likely a first-time buyer, begins the process with a dream. Buyer is risking a substantial portion of buyer’s net worth to buy a business. Buyer most likely knows very little about the business, other than the information the seller has provided. In the best of circumstances Buyer is in a state of elevated anxiety (Fear). The Seller is faced with selling seller’s livelihood (Fear), source of income and likely a fair amount of self-esteem (Doubt). It is a mistake to under-estimate the power and potential impact of emotion in this simple scenario. It is real and it is significant.
With this scenario, fresh in our mind, let’s consider some of the basic steps in the buy/sell transaction process and how basic psychology could have influence. First, the business valuation must be both accurate and defensible. And secondly, the marketing materials used to advertise the business must be accurate and defensible. Sounds simple, but these two items plus buyer/seller emotions contribute significantly to the 85%-90% failure rate. These are the two initial sources of information received by the buyer. They set the stage for the buyer’s initial perception of the business, as well as, of the Seller. As the buyer progresses through the process, they are consciously or subconsciously keeping score; does my reality match up with the sellers written description, are the financials accurate, is this believable? With the accuracy of the valuation and the marketing materials, the seller is teaching the buyer about the seller’s integrity and ethics. How the buyer responds during the due diligence process teaches the seller about the buyer’s integrity and ethics. If there is increasing mutual trust and respect between the buyer and the seller before and during the due diligence process, the likelihood of closing goes up dramatically. If the reverse is true, the probability of closing drops dramatically, regardless of how great the business may be.
There are many other steps in the buy/sell transaction process that can impact the final-outcome. Not the least of which could be financing, leases, third party contracts or other extenuating circumstances. Resolving all of these potential obstacles are part of the normal buy/sell process. Essentially every step in the process is documented, with a form or written policy, except managing human psychology. Ignoring human psychology in the buy/sell process is like picking your lucky numbers and buying a lottery ticket. But, after the drawing is over you realize you picked numbers outside the acceptable range of numbers for the lotto game. You did not follow the proven process. In the lottery example, you lost a dollar. In the buy/sell process the stakes are significantly higher. By simply ignoring human psychology, you may lose 6-9 months of hard work, incur significant expense and potentially lose the best buyer for your business.
Hopefully the takeaway is, understanding that accuracy of the valuation and marketing materials along with interacting with the Buyer, in a professional and respectful manner, sets the stage for managing the human psychology factors of the buy/sell process. Honest mistakes and misunderstandings are easy to overcome if the foundation of trust and integrity is firmly established before the marketing phase begins.
My goal, as a Certified Business Intermediary, is to capitalize on my training as a CBI, and my experience as a buyer and seller, to guide buyers and sellers through the entire buy/sell transaction to achieve a successful closing. If you have any questions regarding this discussion or if I may be of assistance do not hesitate to contact me.