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Beware the Too Good to Be True Offer

Danny, their offer is 21% above your asking price and they want to close in 45 days.”

Immediately after receiving the offer, I had called Danny (not his real name) to tell him the great news. After I described the basic terms, Danny said, “Jim, this is almost too good to be true, I couldn’t be more pleased with the job you have done.” I hastened to remind Danny of the adage “a deal isn’t a deal until it’s done,” but honestly, it was hard to not be excited by the prospect of doing such a great deal so quickly.

To get any deal done in 45 days from a Letter of Intent requires an immense amount of work. The day after receiving the LOI, the buyer sent a three-page, 50-point data request list. “These guys are serious,” Danny commented as we reviewed the list. As we started to assimilate the requested data, Danny realized he could not complete the request without the help of three key employees. This was a bit of a concern because Danny wanted to hold off telling anyone he was selling, but the scope of this data request list made it impossible to not bring these key employees into the loop. But once he told them, everyone went to work to do their part. It was a really cool team effort as these key employees pulled together to help Danny realize this incredible opportunity.

About two weeks into this process, I was at my desk about to wrap up for the day when I got a call from the buyer’s Senior VP of acquisitions. I expected it to be the usual call he and I had at the end of every day to assess progress pulling together the due diligence materials. “Jim, I’ll get to the point,” he said after we exchanged pleasantries, “our investment committee just met and we are not going forward with the acquisition of Danny’s company. We don’t think his model will fit into our growth plan.” My first instinct was they were about to throw out a lower number, that this was their standard price re-negotiation ploy. But after the SVP and I talked a few minutes, it was clear, they were out and had no intention of going forward. He assured me it wasn’t that they found anything wrong or troubling during due diligence, he just kept referring to “a different business model.”

Danny was quite dejected when I told him, and probably upset with me that I let it happen. And to be sure, I did some serious soul searching to understand what I could have done differently to see this coming. But now that I have a couple years to reflect on this painful episode, I have learned two valuable lessons. First, don’t be lured to accept an offer by the promise of a quick close. Due diligence takes time and if the transaction is more than $5 million or so, the buyer will require a deep dive into all aspects of the business. The promise of a quick close is a trap, don’t fall for it. Second, when the offer amount is well above your expectation, don’t get excited, get suspicious. The buyer might be trying to lure you into a lock-down period (i.e., “no shop”) to make sure they get to you before a competitor has time to look under the hood. Simply said, a too good to be true offer might just be an effort to tie you up for a period of time while the prospective “buyer” does his/her homework on whether they want to buy your company.

Unless that too-good-to-be-true offer includes a break-up fee, you can effectively assume you’ll never get a deal done on those too-good-to-be-true terms. In Danny’s situation, the first “buyer” was likely trying to figure out if they wanted to morph their business model to accommodate his company. The good news is, there were other interested buyers waiting in the wings, and we ended up with a really good deal about four months later. Danny is happy playing golf in North Carolina, and this glitch is a distant memory for him. But for me, it’s a painful reminder I offer my clients to this day: when an offer sounds too good to be true, it probably is.

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. .  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The names and fact patterns above have been changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."