Watch our for these mistakes when selling your business

Summary

This video reveals the tactics buyers use to lower the price when purchasing a business, focusing on time manipulation. Buyers often hook sellers with high valuations but later use delays during the due diligence process to reduce the price. The video explains strategies such as the 'document dance,' team changes, lawyer delays, and funding stalls that lead to seller fatigue and lower offers. The speaker also shares tips to counter these tactics, including being highly responsive, setting deadlines, and negotiating based on multiples rather than fixed prices, ensuring sellers get the best deal possible.

Takeaways

• 😀 Buyers often use time as a strategy to lower the price of a business, which can cost the seller significantly.
• 😀 Buyers may lure sellers in with promises of high multiples (5x-7x of net profit) but later lower the offer after due diligence.
• 😀 Exclusive due diligence (DD) periods, typically lasting 2-6 months, can be extended multiple times, building seller fatigue and forcing lower sale prices.
• 😀 Sellers should be aware that buyers want to acquire businesses at the lowest possible price, not to offer life-changing sums of money.
• 😀 Time in due diligence can lead to an offer being based on outdated financial data, reducing the agreed-upon multiple (e.g., from 5x to 2.5x).
• 😀 Buyers may use delay tactics such as document requests in batches, adding new decision-makers to the team, or relying on lawyers to slow down the process.
• 😀 The 'lawyer purgatory' tactic involves lawyers prolonging the deal for higher fees, making the process unnecessarily complex.
• 😀 The funding stall occurs when buyers delay securing financing, which can be used to further extend the due diligence process.
• 😀 When buyers can't secure enough funding upfront, they may offer lower upfront payments and rely on earnouts, which could reduce the overall value for the seller.
• 😀 Sellers should counter buyer tactics by being proactive, organizing all necessary documents ahead of time, and setting clear response times and deadlines.
• 😀 A 'multiple guarantee' approach ensures that the agreed-upon multiple (rather than a fixed price) determines the sale value, protecting the seller from potential depreciation during long due diligence periods.

Q & A

What is the main buyer strategy mentioned in the script?

The main strategy discussed is that buyers use time against sellers, often through extended due diligence periods and delays, in order to lower the business's valuation and purchase it at a reduced price.

Why do entrepreneurs sometimes fall for high valuation promises from buyers?

Entrepreneurs may be lured by buyers offering inflated valuations based on unrealistic multiples, such as 5x, 6x, or 7x of net profit, which later get reduced significantly after due diligence.

How does exclusive due diligence (DD) play a role in the buyer's strategy?

Exclusive DD allows buyers to isolate the seller, giving them time to use tactics like extending the DD process, creating seller fatigue, and reducing the agreed-upon business value.

What is the significance of buyer delay tactics during due diligence?

Buyer delay tactics, such as requesting documents in batches, changing decision-makers, or stalling on funding, are used to extend the due diligence period and reduce the seller's resistance to a lower offer.

What is the 'document dance' tactic in buyer negotiations?

The 'document dance' refers to the buyer requesting documents in small, intermittent batches or asking for reformatting, which can be frustrating and time-consuming for the seller.

How does the 'team switcheroo' tactic work?

The 'team switcheroo' involves introducing new decision-makers during the process, causing delays as these new team members need to be briefed, leading to fresh requests for information and extending the deal timeline.

What is the 'lawyer purgatory' and how does it affect negotiations?

Lawyer purgatory occurs when the buyer's lawyer drags out the process by nitpicking the contract details, often causing delays and potentially making the deal more complicated than necessary, sometimes resulting in the deal falling apart.

What is the 'funding stall' tactic used by buyers?

The funding stall happens when the buyer delays the process by claiming they need more time to secure financing, potentially leading to a lower offer or a shift to a seller-financed deal with a reduced upfront payment.

What countermeasures can sellers use to avoid being taken advantage of by buyers?

Sellers can be proactive by responding quickly to buyer requests, preparing all documents in advance, setting clear deadlines, and negotiating based on multiples rather than fixed prices to avoid losing value during long due diligence periods.

How can sellers protect themselves from a decrease in valuation during due diligence?

Sellers can agree to a multiple instead of a fixed price at the beginning of due diligence, ensuring that the final valuation reflects the business's growth and not the lower performance during the extended DD period.