TRANSITION TALK

The Dangers of Napkin Negotiations

Posted by Jeanie O'Reilly Northcutt on Nov 2, 2016 12:55:10 PM

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The financial services industry is a personable one. Professional networking and client prospecting depend on your charisma and ability to connect beyond surface pleasantries. But when it comes to selling your business, it’s important to keep your cards close to your chest.

It’s very easy to get excited about the prospect of transitioning your business and moving forward in life–especially, when you’re talking with a colleague you’ve known for years. However, the excitement can cloud your ability to think through details and maintain a healthy level of confidentiality. It’s important to avoid casual negotiations and hashing out deals without proper documentation.

These casual conversations–also referred to as handshake agreements, or napkin negotiations–can lead to a lot of problems, including a loss of realized value. 

SHARKS IN THE WATER

The first issue that could arise from the casual mention that you’re even thinking about selling your business is the influx of phone calls or visits from people who want to buy. It’s like blood in the water. And while buyers flocking to you may seem like a boon, it can quickly become overwhelming. Without an efficient screening system, it becomes time consuming and difficult to sift through the phone calls to find serious and qualified candidates, let alone the person who fits your ideal criteria to take over your business. You also make yourself vulnerable to predatory buyers.

Predatory buyers are advisors who will do just about anything to acquire your business. They’ll offer you terms far lower than your business is worth, and spin it as though they’re doing you a favor. They seem confident and knowledgeable, but the information they share and the offers they make are solely for their own benefit.

It’s important to arm yourself with knowledge of the process, and to know the actual value of your business–not just by applying a multiple to your revenue. Without the proper documentation and thorough due diligence, you might find yourself past the point of no return before you realize the situation–if you discover it at all.

TOO GOOD TO BE TRUE

Another big mistake sellers make with a casual or unstructured buyer search, is to jump at an offer without thinking through the details or what they’re giving away. Shaking hands on a price with the intention of hammering out the details later is a recipe for disaster, and a good way to lose value. There is ALWAYS more to this transaction than meets the eye.

First of all, don’t accept less than you deserve for your business. Know not only its fair market value, but what will be spent on taxes and professional (legal, CPA, etc) fees based on that value as you go through the process. These expenses will ultimately impact the value you receive when the deal is complete. 

Secondly, the comfortable nature of casual negotiation could lead to the divulgence of privileged information about your business or your clients. A napkin negotiation regarding the sale of your business situation will lead you into confidentiality minefield.

And finally, a handshake agreement offers no concrete assurance that the offer is serious. Without signed documents in place before discussions and proper due diligence before final sale, the whole deal is incredibly unstable. You could be facing unwelcome surprises at every step including, but certainly not limited to, lack of financing (or unreliable financing), unrealistic client retention contingencies, expected transition timeframes, or skeletons in the regulatory closet.

SIGN & DOCUMENT FROM THE START

Avoiding these issues and instabilities isn’t difficult.

Any serious offer to buy should be given in a Non-Binding Letter of Intent (LOI) contingent on due diligence. This document protects both parties by clearly stating a buyer’s intentions and allowing for termination depending on discoveries made during a deep dive into the business and client base.

To protect client and business confidentiality, a Non-Disclosure Agreement needs to be signed by both sides prior to revealing any information and initiating due diligence. Additionally, due diligence must be performed independently by both parties–you cannot just take their word for it that all is well and capable of supporting the acquisition.

And remember, before signing anything, always make sure to have it reviewed by an industry professional and/or your lawyers. No matter how friendly you and the buyer are in life, deal making is a biased activity. It’s important both sides receive a fair transaction.

CLOSE BUT NO CIGAR

Protecting yourself in negotiations is only half of the equation for a successful transition. When searching for a buyer, it might seem easy and natural to choose an advisor you already know and get along with, but that doesn’t necessarily mean that they’re the right person to take over your business and service your clients.

It’s important to know what your priorities are when looking for a buyer–investment philosophy, designations, experience, and client servicing methods to name only a few. You may need to dig deeper to find out if someone you’ve known for years actually meets your unique criteria.

Remember, there’s no need to settle. If you find that a colleague doesn’t meet all your criteria, you have options for finding that perfect fit. You can continue to look within your professional network (or on your own staff), you can reach out to your BD/Custodial networks, or you can tap into the open marketplace which offers the largest network of potential buyers–and the best chance to find the right match.

MATCHMAKING & SUPPORT

The FP Open Marketplace can help you avoid headaches, wasted time and money. Not only does a search on the open market put your practice–confidentially–in front of the largest group of financial professionals in the industry, but it comes with expert support for the entire process.

Through the open market an acquisition opportunity gets an average of 74 initial inquiries, and through the built-in inquiry and screening processes based on each seller’s unique criteria the FP Transactions Team does the heavy lifting. As a seller, you only see the most qualified, criteria-specific buyer inquiries.

Expert guidance puts proper documentation in place at every stage, and ensures consideration of the whole picture including deal terms, taxes, and timelines. The FP Transactions Team is committed to non-advocacy and works with both parties to craft the best transition for everyone.

Selling your business is not like selling your car. Not only is it a significant financial asset and income stream, but you’ve spent a career building it and getting to know your clients. Treat this transition with weight and care for the continued success of your clients, and for the success of your own next adventure.

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Topics: Selling Your Practice, Acquisition, M&A, Deal Structure, Buying & Selling

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