Why Advisors Should Avoid Handshake Deals

The financial services industry is a personable one. Professional networking and client prospecting depend on an advisor’s charisma and ability to connect beyond surface pleasantries. But when it comes to selling a business, it’s important for owners to carefully consider each and every avenue with a potential transaction. 

It’s easy to get excited closing one chapter and starting another. However, that excitement can cloud a seller’s ability to think through all the details and put too much information out into the open that could jeopardize the full potential of a transaction. 

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.

Be Wary of the First Call

The first issue that can arise from even casually mentioning a possible sale is a sudden influx of phone calls or visits from seemingly professional buyers. While this might seem like a boon, it can quickly become overwhelming. Without an efficient screening system, it becomes time-consuming and difficult to sift through the inbound interest to find serious and qualified candidates, and a shortlist of candidates who fit the seller’s ideal criteria to take over the business.

Predatory buyers are advisors may also enter the conversation. These are advisors who will do just about anything to acquire a business. They’ll offer terms far below what the business is worth and spin it as though they’re doing the seller a favor. They seem confident and knowledgeable, but the information they share and the offers they make are likely solely for their own benefit.

It’s important to arm yourself with knowledge of the process and know the actual value of their business, not just a multiple applied to revenue. Proper documentation and thorough due diligence are critical to not only a successful sale, but one that meet the terms and needs of the seller.

Too Good to Be True

Another big mistake sellers make with a casual or unstructured buyer search is jumping at an offer without thinking through the details or what they’re giving away. Agreeing on a price with the intention of hammering out the details later typically leaves value and terms on the table.

First, sellers shouldn’t accept less than the business deserves. They should know not only its fair market value, but also what the transaction will cost in taxes and professional fees. There are several factors that play into the real cost of a transaction beyond singular deal terms.

Second, the comfortable nature of casual negotiation can lead to the divulgence of privileged information about the business or its clients. A napkin negotiation over the sale of a business leads straight into a confidentiality issues.

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

Document and Sign at Each Step

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, both sides need to sign a non-disclosure agreement (NDA) before the process begins. Due diligence is best done by each party independently. A seller can’t simply take a buyer’s word that all is well and that they’re capable of supporting the acquisition.

Before signing anything, sellers should always have it reviewed by an industry professional and their attorney(s). No matter how friendly the seller and buyer are in life, deal-making is a biased activity. It’s important that both sides receive a fair transaction.

Matchmaking and Financial Advisory Transaction Support

The FP Transitions Open Marketplace can help sellers avoid headaches, wasted time, and wasted money. A guided search through our Open Marketplace not only puts a practice, confidentially, in front of the largest group of financial professionals in the industry, but it also comes with expert support for the entire process.

Through the Open Marketplace, an acquisition opportunity receives an average of more than 50 initial inquiries. Through built-in inquiry and screening processes based on each seller’s unique criteria, our team does the heavy lifting. Sellers see only the most qualified, criteria-specific buyer inquiries.

Whether a seller is embarking on an open market search with deal support or needs expert help getting a deal in progress over the finish line, industry-specific guidance from the FP Transitions team puts proper documentation in place at every stage. We look at the whole picture, including deal terms, taxes, and timelines, and works with all parties through a non-advocacy approach that prioritizes the best possible transaction for everyone.