When representing business sellers it is important to recognize that this is usually their first and only experience in selling their business. That no matter how smart they are, there is no replacement for experience in this complex process. Also, any mistakes made during this process are usually very expensive, time consuming or both. Finally, it is usually an emotional roller coaster for the owner – Am I doing the right thing? is this the right time? What is going to happen to my employees and my customers? Is this the right buyer? Are these the best price and terms I can get.
Because this process is so foreign and the emotions run so high, a seemingly simple action on the part of the buyer, if not anticipated and not prepared for, could disrupt or even blow up a mutually beneficial transaction. If our client gets surprised by a deal event and that event does some damage, I take that on as my responsibility. It takes only one deal to blow up to turn you into a serial client preparer.
To improve our odds of deal completion and success we make sure our clients are prepared for each stage of the deal, from the number one question – why are you selling, to the conference calls, corporate visits, frequently asked questions, letters of intent, buyer negotiations tactics, post closing adjustments, etc. The way we do this is every time we encounter something during a deal that our client should be prepared for or could cause an issue if not properly handled, we write a short article about it.
Then when we are coming up on a particular deal element or deal stage, we send our client the article to read and then we discuss it with them. This is, very importantly, not reacting to the emotions during the heat of battle, but more like a run through practice prior to the big game. The team usually does better if they are prepared for the fake punt rather than experiencing it with the score tied with two minutes to go in the fourth quarter. So our dry run is done with no pressure, prior to the event, and most importantly, with emotions in check.
Just when I think that I have seen all the gotchas there are after fifteen years on grinding out deals, and that my article library was complete, we had a new issue come up which caused several hours of nervousness among the seller’s team and the buyer’s team.
We had all of the major deal terms worked out and detailed in a very comprehensive Letter of Intent (I helped) and were requesting that the partner sellers countersign it to agree to go into quiet period and buyer due diligence.
One of the partners was completely on board but the other could not get his head around not retaining all of his owner perks – company lease on a luxury vehicle, fully paid cell phone, home internet service and a few others. For his future employment with the new company those would be handled at a much less generous customary employee expense treatment.
I was a little taken aback by this and my first thought was, “is this guy going to blow up a deal for what amounts to less than one half of 1% of deal value? Then I remembered why we have written all of these articles. In the heat of battle, this guy was dealing with all of the emotions of turning his clients, employees, and even a good part of his identity for the past decade, over to a new caretaker. I really could not blame him for not displaying some good old fashioned emotionally detached logical thinking. What I had to do was to step back and see if I could provide some solid logic so that he would get beyond this potential (while I was talking myself off the ledge as well).
It went something like this. Bill, remember in the memorandum we made all of those adjustments to remove owner perks from your financials and applied those adjustments to increase your EBITDA. Well those were very powerful because the buyer looked at those expenses as being eliminated after he owned the company and when he applied his 5X multiple your adjusted EBITDA, it resulted in an increase in your sales price of 5 times your eliminated. Now if you want the buyer to incur those expenses once he owns the company will, you be happy with an adjusted purchase price reduced by 5 X those expenses? Believe me, you are much better off with multiplying the perks and receiving that bump in transaction value.
It was beautiful, logical, insightful, but at the end of the day, his partner convinced him to take the deal.
Well, at least I have another article, a little more wisdom, a couple of more gray hairs, and can prevent this from happening on the next deal.
Dave Kauppi is the editor of The Exit Strategist Newsletter and a Merger and Acquisition Advisor and President with MidMarket Capital, Inc. MMC is a private investment banking, merger & acquisition firm specializing in providing corporate finance and intermediary services to entrepreneurs and middle market corporate clients in information technology, software, high tech, and a variety of industries. Dave began his Merger and Acquisition practice after a twenty-year career within the information technology industry. His varied background includes positions in hardware sales, IT Services (IBM’s Service Bureau Corp. and Comdisco Disaster Recovery), Software Sales, computer leasing, datacom, and Internet. The firm counsels clients in the areas of merger and acquisition and divestitures, achieving strategic value, deal structure and terms, competitive negotiations, and “smart equity” capital raises. Dave is a Certified Business Intermediary (CBI), is a registered financial services advisor representative and securities agent with a Series 63 license. Dave graduated with a degree in finance from the Wharton School of Business, University of Pennsylvania. For more information or a free consultation please contact Dave Kauppi at (630) 325-0123, email email@example.com or visit our Web page http://www.midmarkcap.com