Faster closing: Make it easier for buyers to agree on price in a M&A negotiation

It may come as a shock to many business owners that a merger or acquisition transaction can take up to 12 months to complete. While there can be many reasons for the drawn-out process, haggling over price is a common culprit.

With merger and acquisition (M&A) activity heating up in parts of Canada, owners who want to sell their business as quickly as possible, while the economy is healthy, need to understand that very few buyers will make a 100-percent cash offer based on the company’s best or latest year’s results. Most will use an average of three to five years’ worth of records and even then, may only pay 60-75 percent of the asking price in cash and the balance in the form of vendor take-back (VTB) financing or earn out.

However, there are things that sellers can do to expedite the process or help ease the transition period.

Mind the Gap – Bridging the Gap

Wilma Braat, Managing Director, MNP Corporate Finance, says she’s seeing a number of expedited transactions that are only taking between four to six months, rather than the traditional seven to ten. As the recession in Western Canada slowly recedes, there are smaller price gaps between what the vendor wants to receive and what the buyer wants to pay. This leads to less back and forth in negotiating price.

“The selling price of a business cannot be determined simply by stating what you, the owner, would like to receive. Your business advisor should explain how value is determined by buyers before you put a business on the market,” Wilma says. “While there may still be a price gap, realistic price expectations increase the chances that a deal can be successfully negotiated.” When determining the value of your business, key drivers include a strong management team, substantial growth potential, a niche market or large market share, and a diversified customer base.

If the vendor is realistic about price and there is still a gap after offers are received, there are a few ways the gap can be bridged:

Earn Out

If a seller is confident about the future performance of the business, part of the purchase price can be contingent on the company achieving performance goals after the sale. Earn outs usually last one to three years, so if the business grows substantially, the seller could end up with quite a bit more than the cash on close. “An earn out is used quite often by private equity groups as it allows the seller to participate in the upside of the business, while the buyer gets some comfort that the seller will be motivated to help grow the company over the next few years,” explains Wilma.

Vendor Take-Back

If a potential purchaser is unable or unwilling to pay the full purchase price in cash at the time of the sale, the seller may consider accepting some of the payment later in the form of a vendor take-back (VTB). In a VTB, there is a risk that the new owners may default. If that happens, the seller would not get paid as VTBs are always subordinate to bank financing. To reduce the risk, Wilma suggests making the term of the VTB as short as possible — ideally no longer than the time the owner intends on working with the business post-transaction.

“If shortening the term of the VTB is not possible, your advisor needs to make sure there is a potential for the VTB to be paid with any excess cash left over at the end of every year so the seller can get paid back as soon as possible,” say Wilma.

With buyers looking for deals, vendors should ensure that they have prepared their companies to get the best price and that they are prepared to bridge the gap, if necessary, to keep the transaction on track.