Major Business Owner’s Mistake

Waiting For an Offer to Sell Instead of Controlling the Process….and the Outcome

After investing a lifetime of effort to grow a successful business, most owners will not have put any meaningful amount of time into exit strategy planning. As described in the following excerpt from an article recently circulated by an M&A advisor, the results of neglecting to plan for and execute a proper business exit strategy can be disastrous for a seller.

When I was in my 30s, I started an HVAC contracting company from scratch and built it to $25 million in sales and 100 employees. Two years ago, I received a call from a guy who said his company was interested in buying my business. I hadn’t planned to sell, but he threw out a big number that got my attention. We spoke a few more times and, long story short, he sent me a letter of intent to buy my company. It looked good; a clean, all-cash deal with a 90-day close. I had our attorney review it, and I signed it and sent it back.

While the attorneys worked on the contract, the buyer’s people and my people started on the due diligence. The initial list of requests for information and documents was pretty long, and getting everything to them took several weeks. Then came another request for documents, and another one, and we were scrambling to pull everything together on schedule, while I developed a bad attitude toward our buyer and their motives. In the middle of that, one of our best long-term customers called. “I hear you’re selling,” he said. “We think you guys are great, but we’re a little nervous about the change of ownership, so we’re going to shop around.” Similar calls came from other customers, plus a major supplier, and our bank. And, as the grapevine spread, two of our top project managers left us for a major competitor, and other employees starting jumping ship. Meanwhile, I leaned that running a business while you’re trying to sell it is hard. I was so preoccupied with the sale and dealing with the buyer that my management time and attention suffered. Things were getting missed, and customers were complaining. This was especially harmful in our case, because I was a hands-on owner who managed most of our customer relationships and was never very good at delegating important responsibilities or developing upper management. Also, over the years I had run quite a few personal expenses through the business, and the buyer and their financial people were frustrated in trying to get a true picture of our financial condition. So, I shouldn’t have been surprised when the terms of the deal, which looked so clean in the letter of intent, got muddy.

With the deal in the home stretch and most of the leverage on their side, the buyer reduced their offer by 20%, citing “concerns” over the loss of major customers and key employees and the reliability of our financial information; insisted on my carrying back 40% of the adjusted purchase price over five years; and made the deal conditional on my staying on as CEO for two years, to transition my customer relationships and give the buyer time to assemble a professional management team. At this late stage, the buyer had me over a barrel, and they knew it. I resisted their changes to the deal, but, for business and personal reasons, felt like there was no turning back – and it wasn’t like I had another buyer waiting in the wings. I did negotiate a higher CEO salary than they initially offered, and I was able to go part-time after six months, but beyond that they held most of the cards, and we went through with a deal that seemed to go mostly their way.

The truth is, I have only myself to blame. I was undone by my pride – thinking I could achieve a successful deal on my own – and my greed-driven refusal to pay someone to help me sell my business. If I had known then what I know now, I would have done things differently. I would have engaged an M&A advisor before I signed the letter of intent. If the deal had gone through, things would have gone more smoothly, and I would have walked away with more money. If the deal had gone south, I could have taken a breath and started doing the hard work, with my M&A advisor’s guidance, of truly readying my business and myself to pursue a better deal with the right buyer.

THE EXACT OPPOSITE OUTCOME can be expected when a business owner plans ahead and engages an experienced M&A Advisor to properly value their enterprise, and CONFIDENTIALLY market it to qualified investors. With a proper valuation in hand, a well-managed marketing process will produce multiple offers and assure the business owner of the best possible outcome, often in a relatively short amount of time.

During this process, the owner will be able to focus on keeping the business running smoothly, without worrying that customers, employees, or competitors could hear that the business is potentially for sale, resulting in lost business and reduced current cash flow. Owners can also take comfort in knowing that only qualified buyers will have access to any of their sensitive financial information.

The following is an example of the precise outcome that every owner should expect when working with and experienced M&A Advisor to properly implement their planned business exit

In September 2023, the owner a manufacturing facility in New Hampshire was contemplating the sale of his company and engaged A. Neumann & Associates to value the business and guide him in a sale. The annual revenue had recently been between $2.5 million and $3.0 million, and the value of the land and building was set at $400,000.

A Certified Valuation was performed, establishing the business value at $1.350 million. The owner asked ANA to sell the business at that price or higher. In January 2024, ANA went into the market using USPS mail, E-mail, Direct Phone Solicitation, and On-Line Platforms to distribute a Confidential Business Profile, including the offered price and specific structure, to the widest audience possible. Within two weeks, EIGHTY interested buyers had responded, requesting additional information. In order to receive the second, much more detailed Confidential Memo, every interested buyer was required to fill out a three-page Non-Disclosure Agreement, and forward a bank statement showing that the funds for the down payment were available, and that they were financially able to qualify for any necessary lender financing. Finally, each candidate needed to show that they had experience managing a similar or similar sized business.

NINETEEN INVESTORS COMPLIED and received the Confidential Memo.

The Managing Director at ANA then held phone interviews with each of the nineteen interested buyers. Seven were felt to potentially be a good fit and were invited to have a conference call with the owner. Four of those potential buyers were subsequently invited to visit the manufacturing facility and meet the owner.

Ultimately, Three of the four buyers who visited the facility submitted Letters of Intent to purchase the company and the building at the full offered price. One buyer increased their offer by Eight Percent ($100,000). When that offer was accepted, further marketing was ceased. Due diligence moved along smoothly and the transaction closed quickly, only four months after the business was first offered.

One of the two transactions described above went terribly wrong, and the other went wonderfully right.

Both resulted in a sale, however, only one was handled with complete confidentiality and rewarded the owner with higher than anticipated sale proceeds.

It is never too early to prepare to sell your business. If nothing else, owners should speak with an experienced M&A advisor and become knowledgeable about the process long before he or she is mentally prepared to sell. As shown in the first example, waiting for an offer to come to you is never the best plan. Not only are the chances of a strong offer suddenly appearing extremely low, the likelihood of it being the best offer, especially when that offer has no competition, are even lower.

If you have noticed that the light at the end of the tunnel is getting brighter, or you are no longer sure that you want to continue with the daily routine that has been your life for the last 20 or more years, start planning your business exit. Speak with an experienced Mergers and Acquisitions Advisor and learn what is involved in the business valuation and transfer process. Definitely do not assume that the right buyer for your business will magically appear just when you are ready.

Reach out to schedule your complimentary consultation today!