Recently, I was representing the seller of a very nice business to a qualified and strategic buyer.  My client wanted to sell his business at a fair market price, the buyer was highly motivated to buy my client specifically, and had the money to do so. 

It should have been a marriage made in heaven.  

In this case I was representing the seller, so it was not my place to give M&A etiquette advice to the buyer.  So often, I watch buyers and sometimes sellers shoot themselves in the foot when a deal was there on the table that both sides could agree to.  I have been personally involved in closing the sale of 56 different businesses over the past 25 years and been party to dozens that did not close, for one reason or another.  Often, the buyer and seller had the transaction in their grasp, only to watch it slip away due to ego, self-interest, or just plain misunderstandings.  As an intermediary it is my job to guide both the buyer and seller to a place of mutual agreement, and then get it in writing. 

That is easier said than done.

The biggest mistake that I see buyers make is thinking that they are somehow superior to the seller because they are buying his/her company, and not the other way around.  It’s called hubris.  I’m invading your country and I have a bigger army, therefore you should listen to me. 

Go tell it to the Spartans, Persia. 

My advice to even very large acquirers is to humble themselves, listen carefully to what the seller is saying to them and find a way to meet his or her needs, at a price and terms that you can afford.   It is my contention that when you are dealing with even a modestly motivated seller and a financially qualified buyer, that every deal can get done… somehow. 

Even when the buyer and seller are seemingly miles apart in their valuation of the company, there are often missed “bridges of opportunity” that will span that chasm and eventually satisfy both parties.  One of those bridges of opportunity is discussing the seller’s aspirations after he/she sells the company.  Maybe they want to make films, or direct, or do charitable work.  The buyer should be sensitive to that and see if they can make that part of the compensation package.  The other is looking at the tax consequences of the sale on the seller and finding ways to mitigate the large tax bill they could be facing, perhaps by stretching out payments or reclassifying compensation.  Another bridge is looking at the seller’s skills/experience and employing them for years to come – to the benefit of the combined companies.  Often overlooked by the buyer is that fact that the largest assets they are acquiring are the knowledge and relationships of the seller. 

Even when the buyer and seller like each other and fully agree that a merger/acquisition would be in the best interest of both parties, there are always cross currents that can tear any well intentioned deal to pieces.  Deal killer lawyers, voodoo accounting, disgruntled executives/wives/employees, undisclosed liabilities and legal entanglements, and even the health of the key players… can all derail even the best of transactions. 

It should also be noted that time kills all deals.  If the buyer takes months analyzing the seller's financial statements, cannot seem to figure out the seller's business, and also does not keep in communication with the seller or their agent; then you can probably kiss this one goodbye.  Sellers have no patience for wishy-washy buyers. 

The definition of Fair Market Value is: A price, based on what a knowledgeable, willing, and unpressured buyer would pay to a knowledgeable, willing, and unpressured seller.  When neither is under any compulsion to buy or sell.

If the seller is under no compulsion to sell, then it is the buyer's burden to prove to them that it is in their best interest to do so.  If the seller is 66 years old, has no heirs in the business, and has had health issues, then he is under obvious personal compulsions to sell.  If the seller is 46, has family in the front office, and is in the prime of health… then his motivation may be… different.  That does not mean they do not exist.  Every company can be purchased for the right price under the right conditions.

It is incumbent on the suitor to find the tipping point that motivates the seller to act.  And it isn’t always money.  Often the seller’s company has been constrained for years by its lack of capital, and could benefit from the suitor's greater access to cash.  Or access to markets.  Perhaps the seller has other goals and aspirations outside of the company that are going unfulfilled because they feel trapped by their commitment to their business/family/employees.  Often the seller is simply bored running their small company, day in and day out, and would welcome to chance to play in bigger pastures. 

If after fully analyzing the seller's business, considering all the synergies of combining the companies and making the very best offer that one can, the two sides are still far apart... you might want to consider buying less than 100% of the target company.  Remember that 51% control gets you just as much as owning 100%.  There are dozens of ways to meet the seller's expectations without having to walk away from the deal.  Assuming of course that the seller is a reasonable person and actually wants to sell.

While it is true that it almost always comes down to money.  Money is never the only issue and even the price paid for the business can take a back seat to the transaction when the buyer and seller sit down and really listens to what each other needs.

The independent movie distribution business is in something of a death spiral.  You know the one, where the fighter plane is in a flat spin, hurtling towards the earth.  With hands over our mouths we watch the intrepid pilot struggle with the controls to break out of the spin and regain control over his airplane before it smashes into the ground. 

Yeah, like that.

The death spiral that we are in is not nearly as dramatic, but it is real all the same.  Movie company X makes two films: One a $80,000 slasher film with no name actors, a predictable and derivative plot with lots of blood; the second is a $800,000 lovely, coming of age story, with recognizable actors, and some real production values. Movie production company X gives both films to their distributor.  Distributor takes both to the markets, getting MG’s for many of the major territories.  They generate $100,000 for the crappy little slasher movie and $250,000 for the coming of age story.  Having lost a bundle on the coming of age story, and having made money on the slasher film, which kind of film do you think the filmmaker will opt for next?

Although the decline of revenue for the average indie film has been occurring for awhile, it basically came to a grinding stop overseas in 2013, for the vast majority of recently-produced feature films, which did not have any theatrical exposure. Why? Consumers no longer rent DVDs in any great numbers -- with the exception of Redbox here in the U.S. (and Redbox does not exist overseas.) Kiosks exist in certain foreign territories but not for video rental—only sell through. Unfortunately, unless you have a film which has been released theatrically and/or has a well-known cast, or great audience pre-awareness, very few consumers still purchase hard copies of independent films, unless they’re in the $5 discount bin at Wal-Mart.

I suppose that we are all hoping to be the next Jason Blum. 

Since Blum, 45, hit big with Paranormal Activity in 2007, his "microbudget" model has upended the horror movie business. That film, which Blum discovered and pushed after filmmaker Oren Peli made it for $15,000, grossed $193 million worldwide and has spawned four sequels for Paramount.  Studios, faced with increased pressure to cut bloat and release more profitable films, salivate over the three franchises Blum has launched in the past four years: Insidious (a $1.5 million price tag) grossed $97 million worldwide; Sinister ($3 million) grossed $77.7 million; and The Purge ($3 million) grossed $89.3 million. The Hollywood Reporter 2/27/14

Since those financial successes even Blum and his distribution partner Universal have struggled to find a market for the low budget horror/thrillers he is turning out with regularity. Like Roger Corman, or Ed Wood before him, Blum is a victim of his own success. A success that gets harder and harder to sustain. 

When the overseas film buyers are not paying that much more for good films, as they are for crappy films, how do the producer and sales agent break out of the flat spin, and regain control over their flight? 

Answer: Stop buying bad, meaningless films that just bring the market value down on all films. 

Here’s your dilemma: You’re probably not very proud of the “art” that you have to peddle these days, but, you can’t sell from an empty cart either.  Your distribution company has to acquire films that they can make a profit on.  That brings up another problem.  At the bottom… the commissions are so low as to make it hardly worthwhile.  Even if you’re charging 15% - 25%, on a total buy of $100,000 that does not cover your cost of attending AFM, EFM, Filmart, Cannes and all the other shows that you have to be at to do your job.

The obvious solution for all film distributors is access to more capital. Better capitalization gives distributors the ability to pass on the truly bad films and concentrate on the better ones.  Filmmakers rely on the foreign distributors to be able to raise up to 60% of a film’s production budget from offshore buyers.  But when your new releases look just like everyone else’s, all you get is minimum buys. 

The demarcation line is no longer is it a good movie or a bad movie, it’s “is it commercial”.  A North American theatrical release, even as low as 150 screens, will give any film a big lift overseas.  It gets reviews, it gets press, its gets access to film festivals and more.  Or as one veteran sales agent put it to me, “…since very few genre films are being pre-sold, buyers are waiting to see the final film before making a decision. At this point, they simply do not care what the budget of the film is compared even to obviously smaller budget films in the same genre. As one buyer told me recently, “I don’t care if the producers spent $1,000,000 or $100,000 on the budget of a film. It’s not my problem. If it’s not going to be released theatrically, or have an obvious television sale, one particular film is worth virtually the same to me as another – regardless of the budget.” Simply said, the current marketplace is not rewarding better production values in films – unless they’re released theatrically.”

That is of course the impetus behind so many day-and-date releases in conjunction with Netflix, Redbox, Amazon, Blockbuster and others. It gives your film credibility.  Note however that foreign buyers are now savvy to the game of limited US theatrical releases and will ask how many screens, what the P&A spend was, and what the US audience numbers were. Just because you “four-wall” the film in 5 or 6 cities, that does not a theatrical release make.

I’ve financed films before and I know how hard it is.  There is just no substitution for a great story, backed by a well thought out distribution plan, with P&A money to support it… and that’s what gets films made, into theaters, and into our DVD collections. 

You can’t sustain a restaurant selling bad food, you can’t sustain a retail store selling bad merchandise and you can’t sustain a distribution business selling bad films. Sooner or later the customers will simply stop coming.