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November 21, 2014

Warning: Overthinking Can be Hazardous to Your (Financial) Health

Written by  Lance R. Tullius

Don’t be your own worst enemy when selling your business

True story: Bear with me—this may take a while. I recently dealt with a business owner who wanted to sell his business. The business had been performing okay for the past several years, with low single digit year over year growth. The owner was in his late 50s, in good health and with plenty of energy left in his tank, but had been spending more and more time away at his second home and wanted to do more of that and also focus on some different things—thus his desire to sell.

This owner had it in his mind that he wanted/expected to sell for at least $8 million. He shared this with me before my firm had done any analysis, nor for that matter received any hard data regarding his company. From what he did share with me though, I felt his expectations were aggressive and told him as much.

We subsequently performed an analysis of the business and opined that its value was approximately $7 million, a bit over 10-percent less than expectations. I told the client, as I always do in these situations, that while this figure represented our guidance, ultimately you can’t know the exact market value of a business unless you go out and solicit credible offers. As the market has been a good one for seller’s lately, I told this owner that I was willing to invest my time in doing this if he was. So we were off and running.

As we were facilitating the process of approaching and dialoguing with prospective buyers, the business witnessed a quick growth spurt that resulted in about a 20-percent increase in annual revenues. In presenting the business to potential buyers, I shared this with them in the spirit of disclosing all material developments impacting the business, as well as to aid our efforts to secure the greatest value for the business. As this process was carried out, we fielded initial offers ranging from $7 million to $11 million. Yes, you read that right, $11 million!

The minute I shared the $11 million offer with my client, I could tell he was pleasantly surprised. Many of my clients, when presented with offers that exceed their expectations, will hide their emotions from me, thinking that if they show me they’re happy I might not push as hard to get every last dollar possible. This client openly praised me. This was a Friday, so we both agreed that we would take the weekend and then get back on the phone Monday to discuss our next steps.

What happened next is where psychology comes into play. Despite what many believe, our first reaction to something tends to be our most honest one, and frankly, the one grounded in the most common sense. In those initial moments, our minds have yet to have the chance to work against us. So relative to my story here, this guy should have gotten off the phone and said to himself, “This is an excellent offer, one that I don’t want to let go. I’m going to listen to my advisor’s recommendations, and in any event, be inclined to make a modest counter offer.” As you can probably deduce, that’s not what happened. Instead, he mulled the offer over all weekend, thinking and thinking about all sorts of numbers and scenarios. And as our wonderfully complex minds tend to do, he eventually began to question his initial instincts. Notwithstanding that I had become a trusted advisor to him, he second-guessed his own experience and knowledge of his market—and indirectly mine as well. He got to a point where he was picking apart the entire offer. By the next time we talked, just two days later, he had convinced himself that this buyer was trying to steal his business.

Despite my past experience dealing with this sort of response, I have to say I was a bit taken aback in this particular case. I tried to address his concerns and bring balance to his emotions, and we ultimately agreed that I would put together a suggested counter offer for him to consider.

Not two days later, as I was preparing to present him with my recommended counter offer, I received a call from him. He said, and I quote, “You’re not going to believe this, but I was just notified that we are going to lose our largest customer within the next 60 days.” That customer happened to account for over 20 percent of the business. He went on to explain the reasons, particularly focusing on how sure he was that this had nothing to do with quality of service, and there was nothing he or his company could have done to salvage the business. We both agreed that we needed to immediately disclose this to the buyer. I could tell, however, that with this development, the offer we had (“had” being the operative word) was looking really good to him right about now.

Ultimately, we did disclose the pending loss of business, the buyer’s interest remained strong, and they presented us with a revised offer reflecting a price reduction of about 10 percent. After some back and forth negotiating, we agreed on a $10 million purchase price. In this case, it worked out for my client. The shock of the lost business woke him up, effectively restored a more balanced approach within him, and the business was sold at a value that by any comparable metric reflected a great deal for him. I’ve seen other business owners not so fortunate, however. Which is why I try to emphasize, when given the chance, some key principals that I believe should be taken to heart when preparing to sell your business:

1. Know what will make you happy: Before you embark on the process of selling your business, lay out for yourself what will make you happy. What price, if you were able to get it, would you be pleased or satisfied with? How much of that price would be paid in cash at the closing of the transaction. What other aspects of a transaction are important to you. Then as you go down this path, always be mindful of that.

2. Get a professional valuation: Hire the most credible and experienced professional you can find to value your business, again before you embark on this process. If they tell you your business is worth something that is less than what will make you happy, then you need to think twice about exploring a sale. If they tell you it’s worth more, then great news: Your business may very well be worth more than what you’ve determined would make you happy.

3. Do not overthink at any point in this process: This is, of course, my main point. Let’s say that lo and behold a buyer does offer you more, perhaps substantially so, than the price you’ve already determined would make you happy. I’m not suggesting that you instantly accept their offer and run with it. It’s okay to think it over and strategize a bit; in fact, I recommend it. But there’s a fine line between thinking rationally versus thinking from an emotional standpoint. It becomes emotional when you start to obsess whether a buyer is “stealing something from you” or might have a strategic interest that you just can’t figure out. To these points, I say emphatically, “who cares!” If you already know the deal that will make you happy, and you’re being offered more than that, be happier. And if the buyer is giddy about the deal they got, which by the way you’ll likely never know if this is the case, good for them. In the end, overanalyzing things is not only unnecessary, it’s almost always unproductive, and often comes with damaging consequences. Follow these principles and you’ll be happier and healthier, both emotionally and financially.

Lance R. Tullius is a partner at Tullius Partners, an investment-banking firm that specializes in providing merger and acquisition and financial/strategic advisory services to companies operating in select industries.

Last modified on April 06, 2016

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