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You have a window to get a deal done #1

July 28, 2015

Several months ago, I was introduced to an industrial rental business in the Southwest, generating approximately $12MM of revenue and $3MM+ of EBITDA. The founder and owner of the business is 68 years old and has the majority of his net worth tied up in the business. He tried to sell the business back in 2008, but, unfortunately, the financial crises hit and his business, like many others, fell off. Additionally, he acknowledged making a mistake by not hiring a quality advisor to do a broad-based marketing of his company, so he only went to a select few buyers.

Now his business is trending well and the outlook is strong. He has realistic value expectations and doesn't want to miss his window to sell the business into an upwards trend. After spending some time with us, he felt that we were the right firm to market his business. However, he had “a couple of interested buyers” that he wanted to play out, “I will know within two months whether or not they can get a deal done that makes sense for me. If at the end of two months they're not there, I'm hiring your firm.”

You guessed it—when I spoke with him two months later, he said “You need to give me a few more weeks—there is interest!” And down the road we go…

What's his hesitation?

This is part of it:

“Why pay a fee? I have buyers contacting me directly.”

We closed a deal in New England where the owner engaged us after he spent the better part of a year trying to get a deal done with a large strategic buyer. We fleshed out the market and obtained a number of offers, which then forced the strategic buyer's hand. The large strategic buyer ended up paying 11% more than the next best offer net of our fee (6% of the value). We closed a deal in Chicago where we had 7 final Letters of Intent ranging from $12–27MM, it is important to note that the initial offers were 10–35% lower. Our fee on that deal represented approx. 4.5% of the total deal. We closed a deal in Panama, where the buyer who made an offer for our client’s company prior to our global auction did not have a strong enough offer to make it to the final stages of meetings 75% of the time our client ends up selling their company to a buyer they never heard of. When your business is trending well and is operating at a level where a seasoned M&A professional has told you the cash at closing from the transaction will meet your financial goals, strike while the iron is hot and exhaust the global marketplace!

Right now the outlook for the industrial rental business in the Southwest is strong; however nobody can predict the future. Will it remain strong forever without continued investment in equipment, IT and management?

The number one reason we do not get a deal done, or our deals get delayed, is declining financial performance for the company we are selling.

Here's a laundry list of just some of our deals that didn't get done over the past few years, owing to declining financial performance. In many of these instances, if the company had hired us or gone to market just one or two months sooner, or in some cases just weeks sooner, we would have gotten a deal done that made financial sense for them:

  • A manufacturer in NY where we obtained $10MM+ offers, in the range that we spoke of upfront. The 73-year-old owner's 35–year–old son convinced him not to sell—they'd grow the business, etc. About six months later, the business went from $2MM EBITDA to losing over $1MM annually. The company was deeply in debt and was forced to do a deal where the owner walked away with a $500K two-year note. So, this 73 year old entrepreneur, for whom the bulk of his net worth was the business, saw it slip from $10-12 MM of cash to a $500K two-year note in less than a year.
  • A midatlantic based business service company we brought to market had cash offers in the $12- $15MM range. They decided to hold onto the business, and a year later, they were out of business. They liquidated the business and walked away with most of their capital—approx. $1.5MM each—so $3MM versus $12-14MM.
  • A manufacturer in New England realizing record revenues and profits delayed getting us financial information to get them to market. Instead of the customary two months, it took us four months to get them to market. The business did hold up nicely during the marketing period; we obtained strong interest (offers in the $8-15MM range) and got a Letter of Intent signed with a strong capable buyer. However, a month after the Letter of Intent was signed, the company lost more than half of its volume. We haven’t given up on this client. Once he starts trending well again, we will bring him back to market.
  • A business service company in New England, whose two 50% owners disagreed on the direction of the business, decided the simplest way to come to terms was to sell the company. After trying to get a deal done on their own with a couple of buyers for several months, they finally hired us. We obtained strong interest from the market and managed to obtain a signed Letter of Intent, at which point the business was already starting to decline—all parties felt the business would come back, however it has yet to come back.
  • A business service company in southern CA delayed hiring us for about nine months. During the auction process, his business declined by 50%; once we see his business trending back up, we will re–market his company.
  • A business service company in Detroit delayed hiring us for about six months. Their business did hold up during our global auction, and we did obtain a signed Letter of Intent with a strong, capable buyer. Right after we signed the Letter of Intent, they divulged that they lost their largest customer, which represented 30% of their volume.

And the list goes on and on… The number one mistake business owners make when considering a sale is waiting too long to engage an M&A firm; understandably selling their baby is a major decision, and for most of our clients, it is unchartered territory, so naturally there will be some hesitation, second thinking, etc. However, some people get greedy and try to time the sale “perfectly.” They are waiting for the exact right time to sell at the “peak.” However, nobody knows when the peak is until six months after the fact! A proper M&A process take approximately 8–12 months, so you want to feel that the business has legs and is sustainable.

We can all learn from Andrew Carnegie: when asked about how he got all of his money, he said “I always sold too soon.”