With a lot of activity in the market, 2020 is off to a fast start, promising to be another strong year for the sale or acquisition of privately owned companies. As always, serious sellers and buyers with the right motivation and reasonable expectations will succeed.
This month, we want to revisit the topic of buyers “repricing” an offer and how that can impact the seller’s expected transaction prices. We’ll illustrate what repricing is, how it happens and how it might impact the seller’s expected sale price.
It’s extremely important that sellers know upfront that the repricing of a deal is a possibility and what situations might require repricing. Being blindsided by an unanticipated repricing issues in the midst of the transaction process can be a potential “deal killer”.
Let’s go through a simple example to illustrate.
Disclosure: the following is a hypothetical illustration to show how repricing issues can impact the final deal price; results will vary depending on facts and circumstances
What Is Repricing
Repricing is a common occurrence and part of the normal transaction process. Repricing issues are real issues that need to be resolved (negotiated) in order to complete the deal, otherwise the deal could fail. Repricing issues generally occur when the buyer completes their due diligence and finds issues that, in their opinion, should reduce the transaction price, a.k.a. repricing.
Sellers need to have realistic expectations regarding the potential business value and that includes an understanding of possible repricing issues. Consider this typical scenario:
- Bob decides to sell his business because he has realized it’s time to do what he wants to do or for some other ‘the time is now'” reason – but he has not really prepared to sell
- Someone (a friend or associate) tells Bob that your price businesses “3 times the cash flow”
- The past results are:
- So Bob determines his sale price is $1,500,000 (3 times $500,000)
After some time, Bob finds a potential buyer who has offered $1,500,000.
But, while completing their due diligence, they discover 2 significant issues that, in their opinion, result in a repricing of their offer (a reduction from Bob’s $1,500,000 price).
They meet with Bob to review the repricing issues with the intent to renegotiate (reprice) the original price. The two issues they discover are:
- A need for working capital required to run the company
- The need to update company assets (equipment, vehicles, technology etc)
The buyer has determined (in their opinion) the additional cost (investment) for these issues are:
- Working capital needed: $100,000
- Investment needed in capital assets: $300,000
You can see where this is headed… the buyers are going to revise their offer (reprice) and expect Bob to accept the revised purchase price.
Sellers Expected Deal Price – Repriced
How does this impact the sellers expected sale price?
Seller’s expected sale price (above) $1,500,000
Buyer repricing adjustments:
- Bob wasn’t aware of the issues that a buyer may object to and based his decision to go to market with a transaction price of $1,500,000 based on a formula that didn’t really consider the many factors that determine a solid price
Where do Bob go from here? Can the parties renegotiate the deal price or is the repricing significant enough to kill-the-deal and the deal fails (worst case)?
- It is very important to work with an advisor who has experience with the business sale process and can properly value your business.
- Buyers will search for repricing opportunities during their due diligence; it’s one of the reasons they do their diligence – it’s just part of the transaction process.
- Keep cool: if the business price needs to be negotiated, it’s usually just a hurdle not the end of the process. But the issues can be resolved if both parties want to get the deal done and are negotiating in good faith
NOTE TO SELLERS: Owners who reinvest in capital assets, stay current with maintenance schedules and properly manage cash flow will be rewarded in the ultimate deal price. Those who don’t, won’t … it will cost you.
With experienced advisors by your side, we assure you that a proper price will be set based on facts and figures and,working together, most issues can be resolved to everyone’s satisfaction and the deal can go forward.
We’re here to help you with your transaction planning and our consultation is free with no obligation.
This article was written by Eddie Davis C.P.A, C.V.A., Partner at Harvest Business Advisors.
Contact: EDavis@HarvestBusiness.com or 301-325-7687
Clients choose Harvest Business Advisors for our sage advice on profitably growing their business, accurate business valuations, and when the time is right, a consistent ability to deliver a high price as part of a smooth exit transaction.
Harvest Business Advisors provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@HarvestBusiness.com or 877-838-4966 to discuss selling your business, ordering a business valuation or buying a business.