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A Study of Two Deals – the Dangers of Delay

February 13, 2017

By Larry Reinharz

Two of the deals we closed recently had similar characteristics, however with vastly different outcomes for our clients.

Similarities: Both clients hired us to sell their companies which they both had founded and owned 100%. Their companies were both enjoying excellent growth trends, realizing record revenues growth and profits. The owners were 7 years apart, in their late 40’s and early 50’s and had no succession plan. Both of them wished to sell because they felt the next major phase of growth involved skill-sets they didn’t have or didn’t desire to obtain. While their businesses were trending well, they wished to cash out and transition their companies to buyers they felt could continue to grow their respective companies. Both companies also had customer concentration issues, losing their largest customer would materially change their companies.

Differences: Client A walked away with 90% of his deal in cash, which amounted to $37,000,000 in cash and Client B walked away with 8% of his deal in cash, which in his case amounted to $300,000 in cash.

Why the difference?

Client B had a 6 week delay obtaining necessary financial statements for the buyer to complete their due diligence.

After the 6 week delay in obtaining Financial Information for Client B, we still obtained 10 offers ranging from $6 – $12 Million, Client B signed a Letter of Intent with the strongest buyer for $12,000,000 in cash; approximately one month after signing the Letter of Intent Client B lost his biggest customer, so that now the company dropped from $2 Million of EBITDA to break-even.

Unfortunately, in Client B’s case, he was also personally guaranteeing $5 Million of debt and the banks were getting concerned; his loans ended up in the problem areas and he was spending his time fielding calls from bank lawyers. After exhausting all lender take- out possibilities, we found him a strategic buyer that wanted his capacity and geography; if the company performs according to plan over the next few years client B will obtain approximately $8 Million of cash, although nothing is guaranteed.

In both of the situations outlined above, both owners had the good sense to capitalize on their record revenues and profits; the difference is one had timely financial information and one did not.

Unfortunately we have too many stories similar to this one to share; once you’ve decided to sell your company, consult an M&A professional on which information needs to be obtained, which timelines need to be met, etc.…

Which side do you want to be on?