Although economic conditions are difficult, corporate business and real estate deals are still getting done. Here are 10 rules to help you close your deal. These rules apply to both buyers and sellers. The rules also apply to all deals, including mergers, acquisitions, sales of stock, partnership interests, equipment, real estate, intellectual property, trademarks and patents — the list goes on.
1. Make the decision. Only you can make the decision. If you are a buyer, it is a great time to buy almost anything. Although this is isn’t the best time to sell, it may be the right time for you. Maybe you have to sell. That is fine, but you don’t need to let the buyer know that. More about this later. One thing is for sure: Whether you are a buyer or a seller, you need to commit wholeheartedly to move forward. This is no time for indecision.
2. Assemble the right team. It certainly is true that in almost all deals you will need help. You will need an accountant, a lawyer and likely an intermediary. You may also need an appraiser, as well as other specialists. Assembling the right deal team is an art and requires an understanding of the process.
3. Define team member roles. Here’s an example: If you are a seller, your accountant’s job will be to provide historical financial information. If you're a buyer, the accountant will help analyze the financial information provided by the seller. However, the accountant’s most important job is to analyze and advise you on the tax effects of the deal. Taxes can make a big difference. Don’t overlook this, and don’t assume you understand the effect.
4. Manage your team. You are the team owner. Your lawyer is the team manager. You and your lawyer should discuss team member roles and responsibilities at the beginning of the transaction, and make adjustments during the deal as required. You will also need to have a game plan and be prepared to change your plan if conditions change.
5. Price it right. Prices for almost everything are down. That doesn’t mean you have to give your asset away, but you do need to price it realistically. For real estate, that means you have to look at the most recent comparable transactions. For companies and equity interests, that means your advisers will need to critically evaluate future cash flows based on your pro-forma forecasts. You will also need to use a realistic discount rate. Finally, you need to anticipate that the buyer may be looking for a “recession discount” of between 10 and 20 percent.
6. Find the right buyer (or seller). All buyers (or sellers) are not equal. Different buyers want to buy your asset for different reasons. Generally speaking, you want to sell to a strategic buyer, because that buyer may be willing to pay you more (especially now) than a financial buyer. This is the first most important job of your intermediary — finding the right buyer.
7. Find buyer (or seller) No. 2. The second most important job for your intermediary is finding a second buyer. “Buyer No. 2” serves several purposes and is critical to getting your deal done. One of the key roles Buyer No. 2 plays is in finding out what your asset is worth. Your intermediary or an appraiser can estimate what they believe the market price is, but market price is what a willing buyer will pay. If you only have one buyer, you may not get true market price. Buyer No. 1 may be willing to overpay, or may be underpaying. In an ideal market, you have many sellers and many buyers, but unless you have at least one additional buyer, you don’t know what the market price really is. Buyer No. 2 also serves to provide Buyer No. 1 with psychological validation of his buying decision.
8. Use creative financing. As a seller, you will need to be flexible in today’s market to get your deal done. Bank financing is hard to come by. You almost certainly will have to consider at least carrying some part of the purchase price in a seller note. Seller financing is not the only alternative. Can you factor the accounts receivable, or cut a deal with your primary vendor to provide longer terms to your buyer for the first six months? Think outside the box and be willing to use multiple non-traditional financing sources to get your deal done.
9. Don’t sweat the small stuff. Every deal takes on its own life. There will be ups and downs for your deal. Maintaining a positive can-do attitude will help you get through those downs. Stay focused on the big picture and the major important deal points. Be willing to give a little. Don’t insist on anything that is not important as a matter of principle. That is a sure way to kill a deal. Also, don’t let your lawyer and accountant get too bogged down in the details. While details are important, not every detail is important.
10. Get it done quickly. Time is the enemy of every deal. As time grinds on, conditions often change. Windows of opportunity seem to be shorter in a down economy, so get your deal done as quickly as possible.
Jones is a business transactions lawyer in San Diego who has represented buyers and sellers of companies for more than 10 years. He also is a former merger and acquisition adviser, and he specialized in working with sellers of mid-market companies.