The Advantages of Two Broker Negotiations

By Gregory Kovsky with IBA

My firm, IBA, has a long history of welcoming “buy side” business brokers into the transactions we facilitate as a “sell side” business brokerage firm serving Washington, Oregon, & Alaska.  The guiding philosophical principle at IBA is the “Golden Rule” of do unto others as you would want them to do unto you.  Applying this principle to our clients, our mission statement goals for each of our engagements is to facilitate a “win-win” transaction in a timely manner while maintaining an environment of confidentiality where a communication atmosphere of full disclosure and the utilization of “best practices” exist between the parties. 

One fairly common business brokerage practice at peer firms that has always seemed counterproductive and not in a “sell side” client’s best interest is discouragement of the participation of a “buy side” broker in the transaction.  The reason for an anti-collaboration attitude is frequently financial, as “buy side” brokers commonly request the ability to share commission, as is common in real estate, something that is financially detrimental to a listing broker.  This position makes sense from the listing broker’s position, if they can potentially sell the business at the same price to another buyer, but is the position in the “best interest” of the seller and the mergers & acquisitions industry.  The position at IBA is “NO”.  The reason for the negative response is multifold.  First, at a superficial level a business broker should be ambivalent to who the buyer is and whether they are represented.  Their goal should be to deliver the best buyer in terms of price, terms, and ability to their client.  Personal self interest should not be a component to the decision process.  

Self-serving financial motivation aside the following are the five primary reasons why it is beneficial to have business brokers on both sides of the table.

  1.  Knowledge – Plain & simply many buyers, “Don’t Know What They Don’t Know”.  There is no substitute for relevant, specific knowledge at an appropriate place and time. A common place where buyer’s brokers add value from a knowledge perspective involves knowing what questions to ask and documentation to review when assessing a company for acquisition.
  2. Experience – Knowledge is beneficial if you have time to comprehend and apply it.  However, in a dynamic marketplace where buyers are competing for a specific company, the ability to make decisions in a timely manner through application of negotiating strategies can be the difference between obtaining a mutually executed letter of intent and being the buyer who needs to find another company to acquire. Experience is the key to being able to act with confidence in a timely manner.
  3. Ability – The end goal or a middle ground compromise can be self-evident in negotiations, however the ability to get there can be problematic, if the pathway in terms of communication and persuasion are not able to be navigated.  There is a reason that significant training is provided to military pilots before they are asked to land on an aircraft carrier or fly a combat mission. The skill they possess is significantly greater than that of a private pilot flying fixed landing gear small planes. Skill takes time and repetition to develop to excellence.  Mergers & Acquisitions intermediaries are the fighter pilots of business negotiations.  It is not recommended to enter a dogfight with a party of greater acumen in the sky or a negotiation without equal skill on both sides.
  4. Resources – The purchase and sale of a privately held company is a team process.  Both sides commonly will have attorneys, accountants, and other professional advisors.  Assembling a team of knowledgeable, experienced, highly skilled transaction team members can be the difference between completing an acquisition or not.  A business broker can be a great source for names of “deal making” professionals to interview as potential support professionals.  Another important member of the “buy side” team is commonly a SBA or commercial banker.  An experienced, knowledgeable business broker can be a great source for banking community referrals, as they will have current knowledge of present credit approval underwriting standards and the appetite for loans at specific banks in the community.
  5. Communication – Anyone who has studied negotiations knows that often the greatest achievements are made through secondary parties or back channel communication.  In a business purchase and sale negotiation, it is common for parties to mentally & emotionally to dig into positions.  Losing face can become an issue that prevents agreement.  I have witnessed many times where intermediaries and/or attorneys get a transaction “out of the mud” and moving forward by continuing communication and based on familiarity for parties that had “stomped off” thinking the deal was lost.  

In my twenty-eight years as a mergers & acquisitions intermediary, I can recall numerous successful transactions where business brokers on both sides of the table played critical roles in getting the deal done.  One of the best “buy side” brokers in the Puget Sound area is John Martinka.  Mr. Martinka has successfully completed deals with IBA representing buyers since the 1990’s.   Our team often recommends him to buyers desiring professional representation and view his participation as a value adding benefit to the deal. Few possess his knowledge, experience, skill, resources, and communication ability.  I look forward to the next time I walk into a conference room and see John sitting on the other side of the table with a buyer who is prepared and ready to purchase a company.    

Gregory Kovsky, the President & CEO of IBA, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, and estate planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  Professionally, as an intermediary, Mr. Kovsky specializes in the sale of manufacturing, distribution, technology, industrial, marine, and horticulture businesses. Mr. Kovsky can be reached directly at (425) 454-3052 or .  Additional information on IBA, the Pacific Northwest’s oldest business brokerage firm, can be found at www.ibainc.com.  

Dependents Save on Taxes; Dependencies Reduce Value

Here’s an exchange I recently had with a supposedly seasoned businessperson, growth consultant, and business broker:

Me: “There are a couple issues with this business, one in particular seems serious.”

Him: “Oh, what are they?”

Me: “The main issue is the top two customers are 60% of sales.”

Him: “I don’t see why that’s an issue.”

Really? He doesn’t see it’s an issue? Two customers dominating, the top one at 37%. And this in an industry with larger players, low barriers to entry, and the number two customer moved over from a competitor three years prior (and probably would move again to save a few bucks).

It reminds me of a story in my books about a call from a desperate owner who wanted a buyer for his business. He had helped his 80% (of sales) customer get started (as a contract manufacturer), the customer’s owner brought in a new management team, the new CEO had a friend whose company made the same products, and the rug was pulled out with no notice. Bye-bye big customer, bye-bye business.

Ours advice to one and all (especially owners planning to exit at any time):

Get rid of your dependencies.

  • No dominant customers.
  • No key employees (who would be hard to replace).
  • No major supplier (with limited options other than this supplier).
  • No owner dependency. The less the owner does day-to-day the better. It might be tough on the ego but it sure builds value. Strategy, vision, and growth (including by acquisition) should fill the owner’s calendar.

“I guess a man is the only kind of varmint who sets his own trap, baits it, and then steps in it.” John Steinbeck

Hangout with Smart People

I was watching some football over the weekend and some post-game interviews. One question to a quarterback was about why a certain player has made such a big jump this year. The answer, “His intelligence.”

One of my friends and client is Fred Barkman, owner of Spectra Labs. If I’ve heard Fred say it once I’ve heard him say it a dozen times (the old standard), “A people hire A people, B people hire C people.” It’s the same as a boss saying they want to hire people smarter than they are. Or a sales manager stating they want all their salespeople making more than they do.

I’ve been on numerous boards, both for for-profit and nonprofit organizations. There are always a lot of smart people, which is needed because none of us have all the answers (and it’s tough getting through to people who think they have all the answers). I know firsthand as my dad figured there were two ways to do just about anything, the wrong way and his way.

Most importantly, it’s utilizing the smart people you know. For example:

  • In a recent online presentation, a person who recently sold his business advised the audience to use their advisors to help drive the deal.
  • Your team. They often have the answers and need to be encouraged to contribute.
  • Friends and family can add value, as long as you give parameters versus getting unsolicited input on any and every subject.

Bottom line, there’s a reason collaboration works. It turns 2+2=4 to 2+2=22 (or more).

“I love playing with smart players.” Aaron Rodgers

“Intelligence is quickly seeing things as they are.” George Santayana

Lingering On

I’m writing this on November 16. The headlines and stories over the last two days are filled with President Trump tweeting, “I concede NOTHING,” how his administration is not cooperating with the Biden administration on a transition, and his people are saying they expect to be in their same jobs after January 20. Not the graceful transition from one party to the other we’ve had every other time  this has happened, is it?

What does this have to do with small business and business in general? When “uninvited guests” overstay their welcome it leads to stress, a deteriorating culture, and less productivity.

Every, and I mean every, time a business owner brings up the subject of a problem employee and wonders what to do the answer from those who have “been there; done that” is, get rid of them ASAP and you won’t regret it. I have one client who sat on it for five months. Not too bad compared to another who took four to five years. The result is usually a breath of fresh air.

There’s some logic to the SBA rule requiring business sellers to not (officially) be part of the business (as an employee or consultant) for more than one year. I’ve seen instances where the seller staying on worked great, because the seller loved the job and/or the project but hated running the business. I’ve also seen instances where the seller said they wanted to stay and do sales or design products and absolutely couldn’t stand working for someone else. A couple times the seller sabotaged the business by creating conflict within the employee ranks. In one case it was constantly making snide comments about how he (the seller) wouldn’t do things the way the buyer was doing them (implying the buyer didn’t know what he was doing).

A change of ownership requires cooperation. Bringing in a new employee, especially replacing the bad apple, means teamwork. My advice is to have a plan, make the decision, and take action. Don’t stew over it, do it.

“Television is an invention that permits you to be entertained in your living room by people you wouldn’t have in your home.” David Frost

When is a Business Prepared for Sale?

“I guess we’re really not ready to sell” was said to me by a client recently. Here’s the backstory. 

I got a call from a past client, with whom we worked together on four prior projects, telling me two companies in his industry, including his top competitor, were interested in acquiring his firm. He asked if I would help him structure a deal. Of course, I said and please send me what you have so far. FYI, this business is in a slow-growth industry, offers very specialized services, and growth comes mainly from acquisitions, which is how my client grew his business. And the business (industry) has suffered a decline due to Covid.

He sent over an offer from one of the firms, I asked if he was happy with the offer, he said, “No, but I’ll sign it and then we’ll negotiate” (I can “see” all the lawyers cringing as they read this). I advised him not to sign it, but he did anyway. Then he retained my services, which started with my telling the buyer my client was confused on the process, and we needed to work out a different deal.

Over the first few weeks many of our conversations dealt with getting some emotional clarity about what he really wants. He bounced from, “I’m happy to leave” to “I want to phase out over three years.” He’s said he’s prepared to take an offer and close the deal but also realizes both could say no. At one point his spouse thanked me for being there, especially regarding the emotional issues.

We’ve got two buyers, two offers, one more overall money, and the other with more guaranteed money early. One buyer is a fast-moving middle market company driven by information, metrics, KPI’s, etc. The other is smaller, slower paced, and more relationship driven. Both offers have an earnout component so one topic I’ve brought up repeatedly is about how his staff will relate to each buyer because my client’s company does not run at super speed. If the management team, or part of it, leave and sales go down so does his ultimate payout.

Due diligence is overwhelming my client and his staff. I suspect one member of the management team is purposely moving slow because he made it known he doesn’t want it sold to a middle-market firm. This person still has dreams of the management team buying the business even though they are short on capital and have never run a business, just divisions of it.

Back to the opening line, about the same he told me he realized they weren’t prepared to sell I was talking to some estate planning attorneys and we agreed with what the Wall Street Journal wrote years ago, that only about 10% or so of business are ready to sell for maximum value and with a smooth transaction.

Given the above, I feel it’s good to revisit my ACTION™ to sell a business in order to maximize price and streamline the selling process a business seller should follow my ACTION plan. Follow this plan and you will set yourself apart from other sellers. ACTION stands for:

Arrange all the affairs of the company 

Coach and counsel the company. Its people, process and systems

Transmit and teach all the good “things” about your firm

 (and those “things” are)

Intricacies that make your company special, i.e. the non-financial factors

Operations and management systems in place that will make a transition smooth 

Numbers, all the financials in understandable form, straightforward with no “tricks” 

Every deal is based not only on numbers and also on the non-financial factors including customers, employees, lease, suppliers, technology, the market, competition and others. In 2020-21 we also have Covid related non-financial factors, some of which include:

  • Government intervention, for example, are you an essential or non-essential business, can your capacity be capped, hours restricted, etc.
  • The safety of your employees, the cost, and the potential liability.
  • The Covid affect – short, medium, and long term.
  • Increased costs for medical insurance, unemployment insurance, employee turnover, and more.

Conclusion

It’s easy for business sellers to get overwhelmed. The requests for information can be staggering, especially if the owner doesn’t want to bring key people into the loop. This is why planning makes the process smoother and buyers more willing to pay at the high end of the fair price range.

Make it Complicated or Keep it Simple?

Apple and Microsoft are trillion-dollar companies, very successful, have lots of smart people so why can’t either of them figure out how to have an email program without glitches? Email has been around for a few decades, so you’d think they’d have figured it out. 

Apple mail stalls on my laptop when getting new messages. Sometimes to the point of having to close and reopen the program. It slows down my desktop to the point I don’t use it anymore.

Therefore, I use Outlook on my desktop (and Jessica uses it for business email). We agree, it has a horrible search function, you can’t drag emails from one folder to another, and it keeps refreshing itself. Most annoying is when all of the emails in the Inbox disappear and you get a cheerful message about how nice it is to have an empty inbox. Then they reappear, sometimes with new date and time stamps. Sometimes with duplicate copies. Friends have shared they have issues also, some the same, some different. 

Outlook is over 30 times as big as Apple Mail, Contacts, and Calendar combined. And when things get that big, they’re like how battleships can’t maneuver fast, like an attack boat. Are both companies filled with people trying to make things perfect?

Just like in business. Small businesses should be able to move faster and have more flexibility than large ones (Amazon maybe being an exception). It’s one reason why people want to own a business; so they can make decisions and see the result of their actions.

And now is a good time to buy a business, or buy another one. Any time there’s a catastrophic event, like Covid or the recession (or both), it pushes owners thinking of exiting over the tipping point. To take control and benefit themselves from their hard and smart work.

“A marriage is always made up of two people who are prepared to swear that only the other one snores.” (Author) Terry Pratchett 

When You’re Sunk You’re Sunk

Forbes.com reported bankrupt Chucky Cheese is spending $2.3 million dollars to destroy 7 billion prize tickets, which would fill 65 cargo-shipping containers. Why? Because it’s about 25% of the $9 million cost if they were redeemed for prizes. 

We all deal with sunk costs. Buy a new car, decide you don’t like it, you’re out the 20% they say is the immediate market discount. Invest in a new machine, it’s not what you really need, you’re out.

Things like above always remind me of a past client who bought a (what turned out to be) great business for next to nothing (and this is not a pitch like the books and courses on how to buy a good business with little to no money – which doesn’t happen). 

How did this happen? The company expanded from Seattle into Portland, it wasn’t going well, and they got stubborn, as in, “We’ll sell our way out of this.” They didn’t. And, at a peak of the real estate market they bought a building. The buyer got the Seattle operation by paying off the State Department of Revenue, the phone company, and the top supplier. He later told me, “I knew it was a good business, I just didn’t know it would be this lucrative.”

About 8-10 years ago I came up with what I thought was a compelling idea for a line of service to potential clients. It wasn’t as compelling to them as it was to me, so I dropped it. The costs (mostly time and energy) were sunk, gone, and that was okay. I learned a lesson, picked up one client (five projects, none for this idea), a few good marketing tactics.

I mention these things because in the buy-sell world I see all the time owners (and their intermediaries) trying to convince buyers the failed advertising campaign is really profit because it didn’t work. Or, the ops manager who wasn’t as good as he or she claimed is really profit because it was a bad hire.

No. That’s business. That’s life. If you don’t try things you won’t learn what doesn’t work. Not every decision is a good decision (meaning didn’t live up to its potential). The good businesses often just have made more good decisions than not-so-good ones.

“It is inhumane, in my opinion, to force people who have a genuine medical need for coffee to wait in line behind people who apparently view it as some kind of recreational activity.” Dave Barry

What Exactly are You (Personally) Guaranteeing?

In the 1990s, President Trump nearly ruined himself by personally guaranteeing many millions of dollars in loans, and then said he regretted guaranteeing them. But it seems he has not followed his own advice. With the NY Times releasing some of his tax records and other financial information, he allegedly is personally responsible for loans totaling at least $421 million, most of which is coming due within four years.

What does all of this mean? Realize when you get a mortgage or a car loan you are signing a promissory note, guaranteeing you will pay it back. These loans have collateral so the lender can go after your house or car to help repay the debt if you don’t pay. Where it gets “sticky” is when there’s no collateral, which is rare when it’s a personal loan, other than credit cards, which don’t have collateral.

When an individual or small-business owner wants a loan they usually personally guarantee it. When the loan is to an individual, say an executive buying a business, if the loan is to the person it is a legal obligation on that person an in affect, they are guaranteeing it. If the lender makes the loan to a corporation or LLC, which most are, they ask the borrower to personally guarantee it. 

When a private equity firm or similar investment firm borrows money, the partners won’t sign a personal guarantee. The same with larger corporations. So one has to wonder why lenders asked the president to personally guarantee all the loans. Not knowing the details, I can only guess it’s because they were risky loans, there was worry about non-payment, and hiding behind the corporate veil. 

I asked my friend Greg Russell with PRK Livengood Law in Bellevue (www.prklaw.com) about personal guarantees and here are his comments:

  • He reiterated a bank will want a personal guarantee when the loan is made to an entity.
  • Business sellers will want a personal guarantee as they are unsecured creditors, coming in after any senior debt, personal home equity, etc.
  • A borrower with a personal guarantee must report it for any financial dealings and this contingent liability may impact the availability of credit.
  • A personal guarantee can hold for a long time. There is a statute of limitations of six years, which starts from the time of breach. Within this time the lender can get a judgment to keep the debt alive.

Lenders, of all types, have the most interest in personal guarantees so I discussed them with Bill Barclay, Regional Manager of Commercial Banking with Columbia Bank. Here’s what Bill had to say:

  • 95% of Columbia Bank’s loans have a personal guarantee on the borrower. He said, “If things hit the fan, we want them walking down the aisle with us.”
  • Those not having a guarantee are generally larger firms with diversified ownership and management along with private equity firms.
  • If there’s not a guarantee expect tighter loan covenants that may create a personal guarantee if triggered.
  • An existing personal guarantee (from a different lender) won’t have much impact on future credit if there’s only one. The bank will look at all contingent liabilities and multiple guarantees may require a closer look.

Conclusion

Personal guarantees are something business owners, business tenants, those of us in the buy-sell world, and others deal with all the time. Business buyers and other borrowers do their best to avoid them, but those with the money make the rules. I always come back to a client from about a dozen years ago who didn’t like what the bank was doing. He didn’t think they were creative or flexible enough. I commented to him, “The bank’s not in business to be creative or flexible, they’re in business to be paid back.” I know if I lent someone money I’d want as much security as possible. 

Businesses and Workers – It Must be Teamwork

Two interesting articles appeared on September 6. The Seattle Times published a Los Angeles Times article titled, “Instacart shoppers face unforgiving metrics: ‘It’s a very easy job to lose’” and American Compass released an essay titled, “Conservatives Should Ensure Workers a Seat at the Table.

The Times article covers the harsh metrics imposed on Instacart shoppers including ongoing tracking of order filling, notices to employees via an app when they’ve earned a 10-minute break, and monitoring the words employees use with customers to make sure they use the preferred script. They offer low wages, keep employees from getting enough hours to have benefits, and drive them hard. These are the jobs people leave regularly creating turnover and training costs for employers.

The American Compass is a conservative organization so it’s a bit surprising they wrote what they did about unions, including, “Rather than cheer the demise of a once-valuable institution, conservatives should seek reform and reinvigoration of the laws that govern organizing and collective bargaining…” They make the case it’s a mutually beneficial relationship when owners, managers, and workers work together.

Compare the above to most small businesses. Talking to business buyers, I regularly hear about how they like building teams, helping employees grow, and improve. Business sellers often seem to care more about their people keeping their jobs than the price they get for the business (as in, I’ll take a little less from someone I feel I can trust to take care of my people).

Unions came about because of horrible working conditions. In my opinion, one reason they’ve lost membership is they became too rigid and too political (for private sector workers). 

It’s interesting to see how things could swing back with influence from both sides of the political spectrum. It’s also fascinating to see how some technology-based service companies (like Instacart) are returning to the employment practices reminiscent of 100 years ago.

There has to be a balance between management and workers because animosity hurts all.

“Take a rest; a field that has rested gives a better crop.” (Roman poet) Ovid

Owners Should Know What’s Going On, Shouldn’t They?

The September issue of the Fearey Group’s newsletter was titled PR Failure #26: The Ellen-ments of a Talk TV PR Nightmare. FYI, the Fearey Group is Seattle’s premier PR firm and you can see more at https://feareygroup.com/. I appreciate their allowing me to use an excerpt and write about it.

I’m going to tie their newsletter’s topic to small business ownership and buy-sell deals. First, here are what I consider the top two paragraphs for their newsletter.

Sitting atop the pedestal and feigning a lack of responsibility.
It’s hard to hear “Ellen” and not imagine the smiling, bright-eyed, gregarious TV host. This is by design. Everything surrounding The Ellen Show is made for you to equate the face of the brand with those qualities. The show has a merch store on its website and an offshoot video hub, known as “Ellentube.” The logo for the TV show is simply the word “ellen.” Her production company’s name? A Very Good Production. You get the picture. Like many people who make it big, as her celebrity and business grew, Ellen distanced herself from the employees who make her brand and empire function. In her July 30 letter, she stated, “As we’ve grown exponentially, I’ve not been able to stay on top of everything and relied on others to do their jobs as they knew I’d want them done. Clearly some didn’t.”
  
While this may be true, the head of any operation must stay informed about how business is done. Leadership, from the face of a brand to corporate and organizational executives and CEOs, must recognize their culpability in issues that arise and act swiftly and tangibly to rectify missteps. Hopefully, that’s before the issues go public and become a total PR failure. The words of one of the brave employees who came forward have never rung more true as an example for us all: “If [Ellen] wants to have her own show and have her name on the show title, she needs to be more involved to see what’s going on.”

I think the most important line in the above excerpts is, “While this may be true, the head of any operation must stay informed about how business is done.” Here are three ways not paying attention can manifest itself.

Follow the leader – Businesses rely on their reputation. From what the boss does to what the lowest level employees do. When the employees see the owner/boss cutting corners, not carrying about details, or going through the motions, they will also. They will emulate the pride the owner takes in his business. And it will show with quality, customer relations, and the culture. The employees will push the limits, like on Ellen. In my books I tell the story of visiting a company and seeing the employees eating lunch in their cars. Walking in my first impression was, “they don’t care.” It was a dirty mess, and the lunchroom was worse. No wonder people ate outside. Impressions like this do not increase the value of any business.

Can’t see the forest for the trees – This is the opposite of the previous point. This is when the owner is overly involved, won’t delegate, and micro-manage everybody and everything. It’s known as an owner dependency and it means there’s a lot of personal (owner) goodwill versus company goodwill. Recently we were calling one of our client’s customers to get a feel for how they thought of the company. One area of concern was the customers related more to the owner than to the company. This proved to be false, which is great.

I know nothing – Did you know, at least as of a year ago, the most popular TV show in its time period was Hogan’s Heroes (this from a friend who sells TV advertising)? The “I know nothing” line is from that show and it sure is apropos to the Fearey Group’s example, isn’t it? It also comes into play in buy-sell deals when the seller is asked to represent and warranty that everything they told the buyer is true and correct. All of a sudden the owner who brags at her club about how important she is to the business and says it would fail if she wasn’t around now wants to qualify it (at the urging of her attorney in most cases) by saying “to the best of my knowledge” all I’ve shared is true and correct. Let’s face it, there are a lot more owners described in the second example than the first and they can’t claim they don’t know what’s going on. My experience tells me 90% or more of owners know even the most minute details about what’s going on from customer status, to operations, to margins, to the employees. 

Conclusion

The above is why companies should have a board of directors or at least an advisory board. This can keep the owner/CEO from straying or from ignoring things. Healthy tension should be the relationship between board and owner/CEO. Not like what’s been reported about the Boeing board. Boeing was just hit with a lawsuit saying the board of directors was lax on their oversight of the 737 Max issue. Management knew what was going on (supposedly) but weren’t held accountable. This has elements of all three examples above.