- in M&A Update
Back in 2005, our firm was engaged by the founder of a well-known Austin business that had been in existence for over 30 years. The company had revenue in excess of $10,000,000, an established brand, and a total of 75 employees. They had been very profitable, debt free, and the owner (then 70) owned the building and production yard. The general manager wanted to retire, and would remain with the business until it was sold, but this situation triggered the owner’s desire to sell.
We prepared a valuation analysis using the three approaches to value and methodology that were appropriate for this industry and size of business. Unfortunately, the seller’s valuation expectations were above the value range we suggested. His contention was that 30 years of consistent advertising had resulted in significant brand recognition in the marketplace, which should support a “goodwill” value in excess of our valuation.
While we agreed with that statement, the fact is that valuation of this size and type of business was primarily based upon revenue and earnings. There was no trademark, patent, or other intellectual property, just a great reputation that allowed him to charge a premium above his competitors. That premium was reflected in the earnings of the business, and the valuation was well in excess of the asset value, so there was a significant goodwill component to the value we had computed.
The only hurdle was that this business was a C corporation, and most buyers wish to buy the operating assets of a business versus the stock. We prepared a Confidential Business Review and began marketing the business at the asking price suggested by the seller. The economy was robust, so as earnings were increasing so was the value, and we believed that we could eventually find the right buyer who would want to acquire the business. About seven months into the engagement, we received a reasonable offer for the business. We negotiated the price and terms of the transaction, the parties came to an agreement and we had a signed Letter of Intent (LOI) on a Friday.
Addressing the Four Fears of the Business Seller
However, on Monday, our client called and said he needed to come by the office. He arrived and quickly stated that he needed to “cancel the LOI” and keep running the business. After a few minutes of discussion, he agreed to think about that decision for a couple of days before we informed the buyer. On Thursday, he said he had changed his mind and he wanted to proceed with the LOI and the transaction. The following Monday he called and came by again, this time set on cancelling the LOI. We had a meeting with the buyer and our client explained that he was just not ready to sell, so we terminated the LOI. We let things quiet down for a couple of weeks, and then set up a meeting to discuss the change of heart.
In that meeting, we discussed what we call “The Four Fears of the Business Seller.”
- I am going to run out of money before I die. We suggest you meet with a financial planner, and have them prepare a financial plan that provides the answer to that question, and peace of mind.
- I don’t know what I will do after I sell my company. I don’t play golf, fish or hunt, and I worry I will be bored after the sale.
- I will not be president of XYZ Company, with 75 people reporting to me, and so will lose my personal esteem.
- I didn’t receive Fair Market Value for my business.
We took a break for a month, to let the seller address some of these fears, then resumed marketing the business. With the increase in earnings, we found a smart buyer who actually determined that buying the stock of the business at asking price was a wise financial move given that the corporation had no debt. Our seller had audited financial statements, so due diligence went smoothly and all parties were happy with the transaction.
The lesson from this transaction was that a business owner really needs to be comfortable with their exit plan prior to going to market. While this seller’s transaction went well, even at 70 he was having second thoughts as he didn’t have his plan firmly in place. The sale of the business is such an emotionally charged process for many owners that there is quite often a moment when they question the transaction.
The ebb and flow of selling a business can create a significant amount of anxiety and uncertainty for all those involved. Each transaction uncovers its own unique challenges, and part of being a trusted intermediary involves being proactive and effectively navigating through multiple road blocks to achieve our client’s objective. Selling a company is a transfer of assets. Selling your passion is a transfer of emotions.