As mentioned in my previous Blog “Fear – Reading Alpha Red” I think we were dealing with a fire sale.
What is a fire sale? Generally you know it before you get there.
Doing a deal at a fire sale. It’s the end of the day at your garage sale; your mother’s 1970 Nordic track is the last large item. Throughout the day you marked it down from thirty, turning away low-ball offers, to four bucks. The last customer of the day offers you fifty cents and is walking to the car.
Three - At a fire sale there are three objectives. The buyer needs security. The seller has two needs, something to cut their losses and the ability to save face.
Two – There are two problems with a fire sale - Time and Ego
Seller time: Earlier in the sale the seller believes the assets are worth much more than reality. As time goes on the price drops, fear is setting in. Time is the seller’s worst enemy. (Side note: In many deals the first offer is the best, in a fire sale take heed.)
Buyer time: As time goes on and a buyer has been looking at the deal too long, it just does not look as good as last week, fear is setting in. They want security.
Ego: The seller wants to look good somehow, which often adds time, drops the value and screws up the deal. Get over it as soon as possible. Seller – No one ever wants to do a bad deal.
One – There is one answer, security. A deal has to be struck that provides ultimate security for the buyer; the deal has to be done as soon as possible. You are probably looking at pretty stringent seller reps and warranties.
Zero - The next part of the deal is the hardest for a seller to take; in all probability the seller is going to get little up front. The deal needs to be structured around conversion and retention; this is the only way the buyer can obtain security. If you start with this assumption, save time, assist with the transfer of customers, more will stick. By saving time, not doing the deal at the edge of a precipice you will be closer to the market value of the customers.
Security is also to the seller’s advantage, but often they cannot see it.
Zorro - So when the noose is tightening around your neck, look for Zorro, you may live to fight another battle.
Oh, Alfa Red --- the nine odd days between the announcement of the lawsuit and the announcement of the deal was probably an eternity.
I prefer being Zorro.
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