QoE Challenge: Keeping Sellers in the Game - This one is for the Brokers and business owners

We are very excited to introduce QoE Challenge, our offering to give sellers a competitive advantage at the negotiation table. With a QOE Challenge, sellers and their advisors can directly respond to a buy-side QoE, addressing the very document the buyer’s team is using to support their new (read: “lower”) valuation. Let’s imagine a scenario that is fairly common in the M&A world. The owners of a mom-and-pop business decide they’ve had enough headaches and want to sell their business. Over the last 30 years, they’ve built up a 5 million dollar business that won the attention of several PE firms. As it often goes, mom and pop don’t want to spend the time or money commissioning a sell-side QoE. However, the potential buyer does commission a QoE and uses the suggested adjustments to bring the offer down to 3 million. It’s too late now for the sells-side QoE, which could have helped them renegotiate and meet somewhere in the middle. Mom and pop are left without options and are forced to cut their losses so they can move on. How sellers lose control of the narrative Whenever a seller goes to market, they try to move quickly because they are typically optimistic they can sell for a great price. They’ve been building their business for years, making sure it’s performing well and that they have a coherent game plan. So long as the seller is telling the story, there’s no discrepancy about how valuable the company is. Then, while the ink is still drying on the LOI, the diligence process begins. After the buyer commissions a buy-side QoE, the story can change quite a bit. A buy-side QoE will become the new reference point used to define everything from EBITDA to the quality of the customer base. When a seller skips the sell-side QoE, buyers will usually either come back with a lower asking price or just flat out walk away from the deal. Based on our experience last year, 48% of buy-side clients chose to do the latter. However, let’s say the buyer is still interested in the company, given the lowered price suggested by their buy-side QoE. What options does the seller have to push back on the new price? If a seller believes the buyer’s QoE provider was unreasonable, we recommend that they challenge the buyer’s QoE. We believe that sellers should always seek to have the last word in a negotiation. Without a challenge, the seller is left working with a document prepared by and for someone else. It’ll adjust for items they understand differently and use assumptions that are detached from how the business actually operates. Without this nuance that only the owner and their team can provide, the power of narrative resides solely in the buyer’s hands. When should you commission a QoE Challenge? Here are three scenarios that call for a QoE Challenge. Adjusted EBITDA is at least 20% lower than the numbers used to set the initial asking price The EBITDA multiple drops by more than 10% (e.g., from 4.0x to 3.6x) The new offer is at least 20% lower than the original offer in the LOI When you commission a QoE Challenge, our team will review the buyer’s QoE directly. We’ll undergo a thorough analysis as to how the buy-side conclusions were reached. With these insights, you’ll be equipped to defend the value of the business you’ve worked so hard to build. Here’s what we review: Adjustments driven primarily by an outsider’s judgment Add-backs that were rejected or recalculated We’ll look for our own add-backs to drive up EBITDA Normalizations that are too conservative The recasted PL margins and trends For sellers, this creates a way to negotiate against aggressive (and sometimes unreasonable) buy-side adjustments. It also lets sellers provide their perspective on the nature of small businesses that PE buyers might overlook. For brokers, it offers a tool to stay engaged throughout the entire negotiation, without holding up the process or breaking the bank. If you are representing a seller and a buy-side QoE is shaping the discussion, QoE Challenge gives you a way to respond. Worst comes to worst, if the negotiations don’t work out, you’ll still end up with a sell-side QoE to attract more buyers. Throw on a short-sleeve hoodie, and you’re gold. redacted