When clients sell their businesses, they’re usually unlocking wealth – which benefits their advisors. So, any advisor who can offer perspective on these transactions is setting up a win-win. The client gains liquidity and you manage the proceeds.
I’ve explained the process and mechanics of selling businesses before, and over the next few months, I’ll be detailing real-world examples of successful deals (with identifying details changed to protect the innocent).
The first deal we’ll look at was probably the only one in my career that went off almost without a hitch.
A manufacturer of unique plastic and rubber parts, primarily for the auto industry.
The founder owned 80% and his general manager owned 20%, which he’d earned over his 20 years of service at the company.
We arrived with our PowerPoint deck and went through our credentials, past deals completed, our team, the process we would undertake to bring the company to market, and all the preparation involved in doing so.
Then, we started speaking about prospective buyers. In the initial meeting with prospects, we typically go through the types of buyers that would be interested in the client’s company. This list includes strategic buyers (bigger companies in the same industry), private equity firms, private buyers, search funds and so forth.
At that point, the controlling shareholder stopped me and said, “You don’t have to go through the buyers. We know who will buy our company.”
Confused, I asked what he meant.
“ABC Limited will buy our company,” he replied. “They own XYZ company, which is our direct competitor. They also own a supplier to the industry we do not deal with. When they buy us, they will not only be taking out a competitor, they will also be gaining a new customer for their raw material supplier. On top of it all, the President of ABC phones me once a quarter to ask when I’m ready to sell.”
I then asked why he was interviewing M&A advisors if he already knew the buyer.
He said, “Well, I don’t know the first thing about selling a business. As you explained, it’s a lot of work to prepare all the documents required. And you have to research and contact all prospective buyers. I also don’t know how to negotiate valuation or terms of the transaction — I want someone experienced to do that.”
Then he delivered the kicker.
“Most importantly, when the President of ABC gets asked to sign a confidentiality agreement so he can receive a Confidential Information Memorandum from our advisor, he will go crazy. He will pay 50% more than we are actually worth.” He understood that having a formal process could bring out a surprise buyer, and that the President of ABC would want to pre-empt an auction process.
I told him he’d just delivered me my own sales pitch.
He hired us, and it took about two months to get the buyer list together. Once we finished the Confidential Information Memorandum, we approached numerous prospective buyers. When I rang the President of ABC, he was on vacation. In the two weeks before he returned, we received declines from more than 90% of the prospective buyers, so we were down to a short list and a little worried.
I finally received a call from ABC and he was furious. “How dare they go to market with a shopped deal,” he raged. “They know full well I want that company. Send me the package. I will have an offer to you within the week.”
The offer was approximately 50% higher than what we’d estimated as the top end of our valuation range given the company’s EBITDA, capital structure and size.
The final deal
Due diligence was not onerous and legal negotiations went smoothly. Our client was paid cash for 90% of the purchase price at closing, with a 10% holdback for working capital adjustments and other contingencies. Those provisions were quite generous on the buyer’s part. The holdback was paid in its entirety six months later.
Unfortunately for us and our clients, not all deals are quite so straightforward. Next time, we’ll look at a more complicated transaction and explain how we solved problems that came up along the way.