Educating Unsophisticated Seller on Deal Mechanics

September 27, 2023

by a professional from Tulane University - A. B. Freeman School of Business in Portland, ME, USA

How can we educate a non-M&A lawyer and an unsophisticated seller on the typical mechanics and valuations of a deal? Does anyone have any good third-party source to help show what is typical in a transaction? Must be very digestible for non-professionals.

Context:

I am helping negotiate an LOI on the buy-side, the lawyer is not M&A focused and does not seem to understand how a typical M&A transaction works. The broker understands typical mechanics and is trying to educate the parties but so far has been unsuccessful.

Firstly, the lawyer is proposing very atypical terms. They want a non-cash free debt-free transaction, no escrow, a significant earnest-money deposit upon signing LOI, etc.

Secondly, we offered a generous 5x multiple on earnings at $10m despite massive seller concentration, but the lawyer is trying to get an unreasonably high number citing the following poor valuation methodologies:
-Replacement value to create the same new manufacturing line of $12m (real equipment FV is about $5-7m)
-IRR of getting $2.4m annually being paid back in est. 4 year period (really not EBITDA, plus you have $350k CAPEX per year)

We really want to get this deal done given the appeal of the business for our strategy but a path forward is difficult, any recommendations would be helpful

Reply by a searcher
from Baylor University in Fort Worth, TX, USA

Classic win=win negotiation methodology applies.: Right now your BATNA is "no deal." The negotiation is over who will represent and educate the seller. My advice would be to make your concerns explicit - that the seller seems to be taking the advice of people who, while very qualified in their own field, seem to be out of their depth in their transaction. You'd like to get a win-win deal done, but the proposals currently on the table are simply unworkable and seem to be coming from a place of ignorance of the M&A process.

I have had two similar experiences int he past. In both cases, the sellers were turning to their longtime accountants for their main counsel. While perfectly competent accountants, they had zero experience in M&A. I had a sit-down with the owners in each case to discuss the problem and offered to put them in touch with several advisors I respected as experts. I even offered to pay for a little of their time to advise him. It helped and we got the deal done in those two instances. Most importantly, everyone was heard and dealt with honestly.

Good luck!
-Coleman McDonald

Reply by a professional
from University of Akron in Charlotte, NC, USA

And to add on to my comment... The best way to achieve this... Have someone representing you...

Then that person can be the bad guy... They can shield you from the fallout... take blame for it. act as the scapegoat and even position themselves as the person driving it... approach the seller as if you (the buyer) don't even know that they are approaching them about this subject.

If they are good at what they do, they have a much better chance of success while also preserving something you as the buyer need... Your representative should preserve and improve your relationship/partnership with the seller... while achieving your needs and wants.

In these deals, when a seller believes in you, trusts you and feels as though you value him as a partner... worth it's weight in gold. It's very hard to do on your own due to the nature of the transaction and negotiations. Very hard. Thus, my opinion and experience... the benefits of having a representative far far outweigh any negatives as long as they are good..

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