So we all know that the true value of something is the price that:
- is actually paid for it
- to a willing seller
- by a willing buyer
- in an arms length transaction
- with no hidden agendas between the buyer and the seller,
- the buyer being aware of what he is buying.
There are so many hidden things in there, it is almost unbearable: The agreed price has to be paid. It’s no good that you get an unbelievable offer on your business, the documents are signed, but you never receive all your money. While in certain industries and in certain leagues businesses do change hands with very little due diligence being conducted, particularly where other agendas are involved, the result does not represent true value, even if the seller and the buyer are in agreement, and the money is paid.
As a friend and client said to me at the end of last year, after the prospective purchaser had left the building: “Talk is cheap”. A buyer, prospective or actual, will only ever part with his money when he is convinced of everything, if there is any substance to the buyer. As it happened in that exercise, the promised deposit was not paid, and still has not been paid. Had the agreement been amended in accordance with the buyer’s wishes, the seller would be sitting with a huge problem already.
I first saw that particular manoeuvre about twenty years back, when I was caught out. Since then it resurfaces regularly. I call it the Hindlick Manoeuvre: Once the buyer has the seller in the desired position, he says to him: “Lick my bottom*”. And then the nightmare begins.
Due diligence (DD) is a particularly strong tool in the hands of the seller if used correctly, and planned for well in advance of actually selling the business. The idea is that a DD should only be conducted on business sales once a price has been agreed and the purchaser is tied up properly, subject to the performance claims being proven. And that is where good preparation is key.
As a small business owner, you are potentially at great risk to competitors in a DD exercise. If there is a gap for a buyer to walk away having studied all your secrets, your business could lose a great deal of value immediately.
Do it like this:
- These are the performance figures of my business.
- If you like them, let’s agree a selling price.
- You pay a deposit into trust, to be paid out to me when the DD is completed, and I have proven my figures to you.
- You may not start the DD before your deposit is cleared.
- Ok, now the agreement states that if I have lied to you about the performance of the business, you (Mr Buyer) can walk away, or we reduce the selling price with this formula.
- If you do not pay the balance of your purchase price after the DD, then you lose your deposit, and will be sued for the balance. I keep my business.
- The DD is only about the figures I have represented to you. You cannot bring in other extraneous market analysis, “gut feel” woowoo information later, as an excuse to not consumate the deal. If you are uncertain about those things right now, go away and sort yourself out before we agree on a selling price, and sign this document.
There is no guarantee here that the seller is perfectly safe, but the odds have been shortened considerably in your favour. This is a game for big boys. Not for desperate folk with little experience.
And things still do go wrong.
*Not actually “bottom”.