Let the Seller Beware In last quarters newsletter, we discussed some warning signs to watch out for when buying a chemical business. This quarter we discuss the flip side - what does a seller need to watch out for when selling a chemical business? Rather than “buyer beware”, the theme here is “seller beware”. The article that follows describes one common situation that a seller must be prepared for. The buyer’s tactic depicted in the cartoon is employed often, in one form or another. When a seller is dealing with a number of potential buyers, one (or more) of the buyers will sometimes come in with a high offer in an attempt to narrow down or eliminate the competition. Later, after further due diligence but before signing a binding agreement, the buyer then reduces the offer. The first offer made is preliminary and non-binding, so the buyer has no legal liability when it comes in later with the lower offer. While this practice is legal, it is ethically suspect, unless new information justifies the lower offer. Nevertheless, there are unscrupulous buyers out there who will do this, and not infrequently. What is a seller to do when a buyer tries to reduce the price in this fashion? The seller faces a choice: accept the lower offer and close quickly, or bring in some of the other potential buyers, see if they will pay more, and hope for a closing at a later date. Is a bird in hand worth two in the bush? The initial buyer is hoping that the seller thinks so. And very often the buyer is right. This tactic of coming in with a high offer, getting rid of competing buyers, and then reducing the offer after due diligence is completed but before signing an agreement, can be a real problem for a seller. What can a seller do to prevent or minimize its exposure to this type of tactic? In an ideal world, don’t limit discussions to just one buyer until a definitive agreement is ready to be signed. In an ideal selling process, when a business is very attractive and there are a number of hungry buyers, this is not that difficult to do. The typical divestiture “auction” will involve more than one potential buyer until due diligence is completed and a definitive, binding agreement is ready to be signed. The buyer who makes the best offer at that time and is finished with due diligence signs an agreement with no wiggle room. In a less than ideal world, however, very often a seller does not have this kind of leverage. It could be that the business is not that attractive. It could be that it is a buyers’ market, such as we have today. It could be that the seller, for any number of reasons, just wants to limit discussions to a single potential buyer. What does the seller do in these circumstances? In this less than ideal setting, the seller can do several things to minimize the risk of a buyer coming in with a high offer, then cutting it just as closing is about to occur. Set a tight time frame. Once a buyer comes in with an acceptable offer, keep everything on a short leash. Set a tight timetable for completion of due diligence and at the same time, on a parallel path, negotiate the definitive agreement. Letting a deal drag on after an acceptable offer is made is fraught with uncertainty. The longer the process drags, the more that can go wrong. Get a deposit. The buyer should have some downside if it tries to reduce the price or renege on the deal. A deposit will be an indication of the buyer’s seriousness and good faith. Check out the buyer. Ask the buyer if you can talk to other companies it has acquired, or tried to acquire. Find out what the experiences were of those other sellers. See what the buyer’s reputation is in the industry. Does it have a history of playing games? Or does it have a reputation for honesty and integrity in other transactions? Mind the store. This is most important. The selling process can be very distracting. It takes a lot of time and effort, and can be emotionally draining. If key people who run the business get distracted, the business will suffer. The best way to minimize the risk of a buyer trying to reduce the price is to make sure the business continues to be managed and grown as it has in the past. In some cases, special incentives might be in order for key employees. As a seller, there is no better position to be in when the buyer tries to reduce the price than to be able to say, “Thanks, but no thanks” and move on to other potential buyers with the knowledge that the business is getting stronger every day and therefore is worth even more.