Seller Expectations and Repricing Issues

Seller Expectations and Repricing Issues

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.

Seller Expectations  

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)

 

Repricing Issues

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:

    1. A need for working capital required to run the company
    2. 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:

    1. Working capital needed:  $100,000
    2. 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:

blank  

 

Bottom Line:

  • 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)?

 The Takeaways

  • 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.

SBA announces two new modules to Money Smart for Small Business program

SBA announces two new modules to Money Smart for Small Business program

Harvest Business Advisors works with Small Business Administration (SBA) lenders for many of our transactions. Our entire team keeps up-to-date on all SBA programs and announcements to better serve our business brokerage clients and our business valuation clients.

We’d like to share this recent announcement from the SBA about addition of two new modules to their “ Money Smart for Small Business ” curriculum. The two new modules are Banking Services and Building Strong Credit.

“Money Smart for Small Business aims to help small business owners and entrepreneurs understand how a strong banking relationship can help them achieve their vision,” said Elizabeth Ortiz, Deputy Director for FDIC’s Consumer and Community Affairs.  “The relationship between banks and small businesses is symbiotic: when one succeeds, so does the other.”

For the complete announcement from the Small business Administration, please visit https://www.sba.gov/about-sba/sba-newsroom/press-releases-media-advisories/sba-and-fdic-updates-money-smart-small-business-credit-and-banking-modules

To learn more about the Money Smart for Small Business program, please visit www.fdic.gov/smallbusiness.

If you have any questions or need more information about SBA lending practices and requirements or a business valuation for a SBA loan, feel free to connect with us for a conversation.

 


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.

Small Business Administration: Updates and Announcements about SBA Loans

Small Business Administration: Updates and Announcements about SBA Loans

Harvest Business Advisors works with Small Business Administration (SBA) lenders for many of our transactions. Our entire team keeps up to date on all SBA announcements and Standards of Practice changes to better serve our business brokerage clients and our business valuation clients.

We’d like to share this Lender and Development Company Loan Programs announcement from the SBA:

This SOP contains the SBA’s eligibility requirements for lenders and CDCs and the policies and procedures governing the CDC/504 and 7(a) loan programs.

Subpart A

This subpart contains the requirements for lenders and Certified Development Companies (CDCs) to participate in SBA lending programs. This subpart also explains the different levels of delegated status SBA grants to lenders and CDCs, as well as how lenders and CDCs maintain their participating status with SBA. Finally, this subpart gives a brief overview of how SBA oversees its participating lenders and CDCs.

Subpart B

This subpart contains the policies and procedures governing 7(a) business loan programs including standard 7(a), the Preferred Lenders Program, SBA Express, and the Agency’s Pilot Loan Programs.

Subpart C

This subpart contains the policies and procedures governing SBA’s 504 Certified Development Company Loan Program. The policies and procedures governing Certified Development Companies are contained in Subpart A of this SOP.

For the complete announcement from the Small business Administration, please visit

https://www.sba.gov/document/sop-50-10-5-lender-development-company-loan-programs

If you have any questions or need more information about SBA lending practices and requirements or a business valuation for a SBA loan, feel free to connect with us for a conversation.

 


 

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.

Want to Buy a Business? Letters of Intent 101

A properly crafted Letter of Intent (LOI)  is an important step after making the decision to purchase a business.

(Please note this is NOT legal advice.  Please retain an attorney familiar with local laws and customs before you finalize any purchase agreement).

The Letter of Intent is drafted by the Buyer and their advisors to inform the Seller (and their advisors) of the Buyer’s decision to formally discuss purchasing the business for sale.

The Letter of Intent is a preliminary document where the Buyer and Seller “agree to agree”.  Changes and edits can be made to the Letter of Intent to satisfy both parties.

The Buyer will have disclosed their financial standing and resources to the Seller already and signed a Non-Disclosure Agreement.  The Seller will have shared  financial information with the Buyer and provided a Confidential Business Review.

The Letter of Intent sets the due diligence process in motion.

“Ten Steps to Increase the Value of Your Business – click here to download today.

Discuss with your advisors what you need to include in your letter of intent. Now is the time to ask questions, receive advice and process information about important decisions.

There is no typical Letter of Intent since each business sale is unique. However, there are some standard features:

Purchase Price: The purchase price is the total amount the prospective buyer will pay for the business.

Financing Specifics: Describes the basic deal terms such as down payment, financed amount (either through bank or seller), and if necessary, contingency details. If you intend SBA financing, all variables (other than payment of a fixed amount note) must be fully determined by one year from the closing date.

Due Diligence: The due diligence clause outlines the length of time the buyer has for their investigation process on the business. There should always be a clear start date and end date

Basic Conditions of the Sale including (but not limited to):

Earnest Money:  To confirm the buyer’s seriousness about buying the business, the LOI will include a set amount  of money paid to confirm the agreement. This protects the seller if the deal does not happen and time and expenses are lost.

Expenses: Outlines who pays what expenses.

Expiration: Details the termination of the agreement presented

Closing or Conditions of Closing: Usually outlines the high level details about closing the transaction, what the parties anticipate. Some of the items that can be listed here are closing date and any important contingencies, by either party. Decisions about who will write the final contact would be stated here.

 

We have found that asking what the minimum or maximum of something (price, down payment, seller financing, etc.) tends not to be productive.   It is almost impossible to get specific on a part of the transaction without have a reference to the whole offer.  The answer will always be – “it depends.”

Connect with Harvest Business Advisors today – email info@harvestbusinessadvisors.com or call 443.334.8000

Often to protect themselves, buyers add earn-out or claw-back clauses.  At a high level, this means buyers would tie payments into resulting cash flows.  Usually we use revenues because any other cash flow (such as profit) since it is hard to agree on later.  An example from a recent transaction is:

  • Last 3 years average revenues was $1,300,000.  If revenues from the 12 months following closing are less than $1,235,000 then the price will be reduced $1 for every $2 of revenue loss.  The price will not adjust beyond the $130,000 note amount and will be offset against the note to the extent the note is outstanding.

Arrangements for sellers to stay involved with the business beyond the closing or other milestones would also be included in a Letter of Intent.

A well-written Letter of Intent should bring parties together and help lay out terms as a way to reduce the risk of litigation and set the course for a successful deal.

We are happy to answer questions about Letter of Intent or guide you through this negotiation process.

It is an intricate dance.

In the end, with patience and perseverance, a Letter of Intent can be created that everyone can live with at the time of negotiation and be quite pleased with one year later.

 


Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest 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 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

The One Thing Most Buyers Don’t Do Before Buying a Business AND It Affects Business Value.

Most buyers are obsessively thorough in their approach to buying a business. They exhaustively analyze the opportunity. They meticulously comb through the financials. They create long lists of questions for the seller. But there is one thing most of them don’t do.

Most buyers don’t really think about the day-to-day tasks of the business.

Some businesses are sales oriented. Others have a service focus. Some are centered around production.

Buyers need to ask themselves “Does the focus of this business work for me day in and day out?” and “What will I actually be doing each day?”

The savvy buyer will ask to shadow a business owner as they go about a typical day.

One buyer met the owner of an electrical business at 7AM and jumped in the truck with him as the owner visited job sites and interacted with employees. He then accompanied the owner back to the office as he planned for the next day and completed administrative duties. Participating in this “ride along” with the electrical company owner assured the buyer that this was the business for him. He came away from the experience exhilarated and ready to make an offer.

Another buyer expressed interest in buying a bar because “bars have music and I like music”. We suggested that this buyer follow a bar owner around for one weekend to view firsthand how much music the owner enjoyed. The buyer quickly saw what being a bar owner really meant in terms of daily tasks and realized that there was more administration, more hands-on management and far less enjoyment of music then he’d expected. The buyer decided to pursue another type of business to purchase.

There are many, many elements to consider when purchasing a business. Just be sure not to overlook the one that is going to impact you every day once you are the business owner.

 


Clients choose Harvest Business Advisors for our accurate business valuations and our 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 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

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