Managing Seller Expectations in Proprietary Transactions [PODCAST]

Managing expectations is always part of any M&A transaction–for both buyers and sellers. However, it becomes even more important when a business owner is a first-time seller and therefore unfamiliar with the process. Another complicating factor may come into play for businesses that don’t have a robust banking partnership to help facilitate a transaction because their day-to-day banking needs don’t warrant it.

Taylor Hanson of Camano Capital recently joined Redpath’s Joe Hellman, host of The Transaction Abstract podcast, to talk about managing expectations, specifically during proprietary deals. A proprietary transaction is when a specific buyer is given the first opportunity to purchase a company without a broader auction process. 

Hanson specializes in working with lower-middle-market companies that typically are not large enough to catch the eye of traditional funds or private equity firms. Frequently, Camano helps companies through proprietary transactions.

Why Does Managing Expectations Even Matter?

Smaller, less experienced companies are typically unbanked or lightly banked. In other words, these types of companies may not have a sophisticated M&A advisor to help them navigate a sale. In some cases, they may have representation that may not have significant M&A experience. For companies that are unbanked, the concept of a proprietary transaction may come into play. 

Building trust in the process is paramount. Establishing a close working relationship is crucial as the process may take longer in a proprietary setting. Managing expectations early around timing, data required to gain comfort over the business, and the level of diligence that will be conducted helps prevent misunderstandings that might otherwise lead to problems later on.

Resources: Guide to selling a business

The Proprietary Transaction Timeline

The process for a lightly banked or proprietary transaction may take longer to unfold, but it usually follows the same cadence:

• Indication of interest
• Further diligence
• Letter of intent
• Confirmatory diligence to close

It is essential that the seller understands the why behind these steps and how each step supports the ultimate goal. The funding infrastructure may also be different in this type of transaction, and that further lengthens the process, so continual communication and updates on status are important.

Confirmatory diligence is also generally the same. It runs the full gamut, including:

• Financial
• Tax
• Legal
• Market
• Insurance and benefits
• IT

In every transaction, the confirmatory diligence will be tailored to the business model. There may be something that is particularly important or relevant to the business—IT, for example—that requires a deeper dive.

Extended Timelines Increase Risk of Deal Fatigue

Especially for sellers who do not have an M&A advisor, managing expectations comes down to building trust and communicating clearly and frequently. This includes explaining secondary deal points that are common to the M&A process but are not necessarily on the seller’s radar. Small points can become a bigger issue later on if the seller’s expectations are not clearly set and maintained via ongoing communication. Without that, trust breaks down.

Pitfalls Hanson most commonly sees in proprietary transactions include working capital, sales tax, and topics that have not come up earlier, such as the LOI, the escrow, and the timeframe. Clearly explaining these issues up front helps the seller better understand the entire process. 

Resource: Tips for avoiding deal fatigue

Best Practices to Manage Buyer Expectations

• Bring in help and resources as soon as possible to increase transparency for the seller and to help them understand they do not have to do everything on their own.
• Bring in advisors who can deliver good M&A counsel—for example, an attorney with M&A experience. This helps get to the closing table and helps the seller understand what the buyer needs, to avoid problems.
• Make sure LOI wishes and intentions are spelled out up front based on the level of detail available, noting that these will be included down the road.
• Keep in mind that this is not just a financial transaction for the seller; it is emotional. Their goal is to find the next steward for their business to continue the legacy.

Best Practices to Manage Seller Expectations

• Explain the timeline and process most business sales follow.
• Explain the level of due diligence that a typical buyer will expect to see in order for them to be comfortable.
• Discuss key thresholds around earnings and working capital. Getting on the same page for these early on will help smooth the process as you approach the closing table.
• Confirm which diligence streams and support will be provided to the buyer. This helps define the scope of work that needs to be completed for a transaction to be successful.

Well before it is time to sell, business owners should take stock every year or so. Carry on a “living conversation” with your closest trusted advisors to learn what the process will be like when the time is right. Know what you would want from a deal, and have a number in mind that you would sell for.