Buyer be aware

Jan. 1, 2020
There is a strange wisdom about negotiations: if both sides are grumbling after the deal is done, it must be a good outcome.

There is a strange conventional wisdom about negotiations. It goes something like this: if both sides are grumbling after the deal is done, it must be a good outcome. Behind this backwards truism is the idea that if no one got too much and no one got too little, all is well in the universe.

In the world of collision shop acquisitions and negotiations, the rules are even more complex, in part due to the fact that the acquiring entity (buyer) is usually larger than the selling entity. This is accentuated even more when the buyer has prior experience in acquisitions and the seller has never dealt with the process. This dynamic – the belief that the buyer is in a superior bargaining position because of resources or experience – can color the process no matter the size of the deal.

Whether you are considering adding your third shop or your 23rd, there are a few things all buyers should be aware of. They are deeply rooted in respect for the owners and businesses you are contemplating buying and the belief that the best deals actually do yield a happy buyer and a happy seller.

The acquisition courtship
A 10-unit business in a geographic market wants to acquire a one-unit business in the same market. The dominant MSO in a state wants to venture into an untapped segment of the same state. A multi-state MSO wants a new platform in a new state. Regardless of your size or influence, whether you are approaching a healthy business or one that is struggling, if you’re looking to acquire another business, you have a choice to do it with a new-sheriff-in-town attitude or not.

Too often we hear of MSOs forebodingly approaching potential acquisition targets, implying that if the seller does not enter into a transaction with them, the seller’s business will be on shaky ground. While a seller may actually be in a precarious position, why make or insinuate a threat in the early stages of a courtship?

Anyone who has owned and operated a collision business has thick skin; it’s required. To be clear, this is not about tender feelings – it’s about respect. That business you’re looking to acquire is someone’s life, and it is precious to them. In most instances, the seller knows the landscape where they operate better than you, and they may be poised to sell. They just don’t want to sell to you, Mr./Ms. New Sheriff. You’ll have to trust me on this.

Good counsel
Every acquisition is unique. But most buyers who are MSOs have probably gone through at least one acquisition, and already know the framework of the process. There is the informal chat followed by a non-disclosure agreement, information exchange, a letter of intent, due diligence, purchase agreement, etc.

For many sellers; however, this is new territory. Sellers often look to the professionals who have served them well in the past, not recognizing that an acquisition involves a level of complexity that these previously trusted advisors may not possess. For instance, smaller businesses may call on a general practice attorney or even a business lawyer adept at handling small contracts and collection matters, but not fully versed in the myriad details that are required to represent a client in a merger or acquisition transaction.

Astute buyers welcome sellers to enlist advisors who are skilled at getting transactions done. For some, this may sound counter-intuitive. “Why would I want a seller to have a deal-savvy lawyer?”  It’s very simple: lawyers who specialize in transactional work don’t throw grenades at deals. An experienced lawyer can serve as an advocate and educator for the seller, smooth the process and get the deal done. Sure, that same lawyer may also educate the seller to ask for more or to structure the transaction differently than you might prefer, but you won’t buy it if it’s not worth it to you, right?

The same thing may be true of the accountant who is great at small business accounting, but does not have expertise in purchase accounting, taxation or estate planning.

Don’t be afraid to respectfully encourage a seller to enlist experts with the skill set necessary to get the deal done.

A private matter
Many an MSO has enjoyed the rumor that they were entering a market, even when it wasn’t true. For MSOs, the perception that they are healthy, growing and on the move is generally a good thing.

However, for sellers, even a whiff of rumor that they are looking to be sold or are in negotiations for a sale can be damaging. Once negotiations are proceeding in earnest, sellers, sometimes in cooperation with the buyer, want to control the timing and content of the message. Sellers want their employees to hear about the sale from them rather than hear it on the street. And they want to talk to their DRP partners, among others, and let them know there is a transaction in the works, and assure them of the continuity of the work under the new owner.

Unfortunately, sometimes, even after the parties have signed a non-disclosure agreement (NDA), the word gets out. This often occurs innocently when, for instance, the potential buyer asks a paint vendor or an insurer their opinion of a certain market opportunity or collision repair organization. A seemingly innocuous question like, “What do you think about X Body Shop?” can start the wheels turning.

Sometimes leaks occur because of sloppiness. Active buyers may have a team and a routine for acquisitions that becomes mechanical. Not unlike that daily morning drive where you don’t remember the details, you just know you made it to work, in the course of what may be routine activities for an acquisition team, leaks sometimes occur through inadvertence and carelessness.

Regardless of how it happened, the unintended consequences of telegraphing the intent to enter a new market are harmful to the seller, potentially harmful to you as a future owner of the seller’s business, and at the early stages of negotiations, can create an environment of distrust. Bottom line: with each new transaction, huddle with your team and reinforce the sanctity of the non-disclosure requirements.

Due diligence and negotiations
For buyers, it is imperative to know as much about the target acquisition as you do about your own business. This means implementing a robust due diligence process. Spend the time to review the seller’s financial statements, contracts, business trends, environmental reports, client KPI reports, personnel records, and equipment adequacy and condition, among other things. But remember, how you and your team comport yourselves as you put the seller’s business under the microscope can influence the outcome.

Building trust in negotiations is a critical factor in the best deal outcomes. We have looked behind the curtain on many acquisitions and never have we heard a buyer say they got a good deal or paid under market because the seller didn’t understand how to value their business. Nor have we heard a seller say they were glad the buyer didn’t find out about a known problem with their business that would have impacted the business valuation.

Trust is built through transparency and consistency of words and actions. That means throughout the acquisition process consistently doing what you say you will do, meeting deadlines, returning phone calls and e-mails, and answering questions (especially the repeated questions anxious sellers are prone to ask) with patience and respect. These all represent mini-promises, which can either be kept or broken. When too many of these promises are broken – even the seemingly benign ones like “I’ll call you back later today” – it erodes trust. When that occurs, and a buyer needs to deliver bad news, like make a business valuation adjustment because of a liability discovered through the due diligence process, a seller may be more inclined to think they are being squeezed or that the buyer is posturing. But where there is trust, sellers are less likely to impute ulterior motives to the buyer.

In transactions where the seller is struggling, astute buyers think “big picture,” recognizing that what may be a small deal point to them – even one they could prevail on because of the seller’s weakened position – may be a big deal to a seller. Smart buyers need not apologize for recognizing a great opportunity to transform an under-performing or mismanaged business, but they don’t need to spike the ball, either. Staying attuned to this dynamic in negotiations also engenders trust.

In general, empathy goes a long way in the process. Remember, if you’re an MSO, you’ve likely been through this before, but it may be a completely new experience for the seller.

Your reputation precedes you
People talk. How you courted the last seller, and whether you built trust through your words and actions, are just as important as the price you paid for their business. In fact, if you came up short in those areas, there’s a good chance the deal never got done. For the MSO with aspirations for growth beyond the last deal, it’s important to remember that the seller from your last acquisition will either be your biggest fan or your greatest detractor.

Editor’s note: Marcy Tieger is a principal with the consulting firm Symphony Advisors, LLC, which focuses on delivering strategic marketing, operational and financial advisory services to the automobile aftermarket parts and services supply chain and to automobile insurance physical damage claims organizations. She can be reached at [email protected].  

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