Confessions of a Do-It-Yourself Business Seller

How selling his company on his own stole some of this business owner’s joy – and financial gain – from what should have been his crowning achievement.

My name is Dave, and I sold my business without using an M&A advisor.

[Group response] Hi, Dave.

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 learned 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.

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This fact-based account of a good deal gone bad illustrates many of the benefits to business owners who entrust the sale of their company to M&A advisors in general, and to IBG Business in particular.

Confidentiality. The nightmare experienced by “Dave” when news of his pending sale hit the streets could have been avoided.

When IBG markets a business, we never identify the company or where it is (our description would be limited to, e.g., an “HVAC contractor in the western U.S.”). When a prospective buyer responds to our general or blind profile, they sign a confidentiality agreement and go through a screening process. Only then do they receive our confidential information memorandum (CIM) that describes your business and suggests its true market value.

Buyer Competition. At IBG, one of our cardinal rules is “one buyer is no buyer.” If a potential buyer is the only horse in the race, that gives them power and leverage over you.

In Dave’s deal, he put himself behind the 8-ball the moment he returned the buyer’s letter of intent. From that point forward, the buyer was in the driver’s seat.

To level the playing field, IBG’s M&A professionals work very hard to create competition for the business. People want to buy what’s hard to get; if they know they’re competing with someone else for the business, they’re liable to pay a lot more than they – or you – ever expected.

Readiness for Sale. Dave’s business wasn’t ready to be sold for maximum value. If he had engaged IBG, we would have, among other preparatory steps:

• recast the company’s financials, segregating Dave’s personal expenses and purchases, to show its true earnings and market value, in a format that a sophisticated buyer would recognize;
• helped him assemble and/or structure a management team that could have profitably run the company with less involvement by Dave; and
• helped him transition his customer and supplier relationships to the appropriate members of his management team.

Market Value. We don’t know what Dave’s buyer offered for his company, but we can be certain that they didn’t offer a penny more – and probably substantially less – than they thought it was worth.

One of our first steps at IBG is providing guidance on the anticipated market value through our proprietary models and databases of comparable sales. While this helps establish a basis for future measurement, no one knows what a private company is worth until we have received multiple offers from qualified buyers. At IBG, we consistently attract top dollar for our subject businesses by following nine essential steps for achieving maximum value.

Due Diligence. First-time sellers often assume that the main value of their M&A advisor is in attracting potential buyers. But after successfully navigating the due-diligence phase, you will have a deeper appreciation for what your IBG intermediary helped you achieve as an intermediary and emotional buffer with your buyer.

Your IBG professional will help you prepare for, understand, tolerate, and navigate the due diligence process – successfully and with minimum disruption.

Deal Terms. Unless a business owner has been involved in multiple transactions over the course of his career, it is impossible for him to know what terms and conditions are both reasonable and standard. Escrows, indemnifications, and purchase price allocations all have serious risk and financial implications that warrant guidance.

Maintaining Profitable Operations. A common problem for business owners who are trying to sell their company directly is that they get so focused on the sale that their business starts to suffer.

Your IBG M&A professional will coordinate the sale of your business while you focus on what you do best: running your business, making a profit, and growing the company’s market value.

THE VALUE OF IBG: AN OVERVIEW

In choosing IBG Business to manage the marketing and sale of your company, you can expect to achieve major benefits that distinguish us from (a) business brokers and other M&A advisors and (b) the outcome that you would likely achieve through your own efforts:

• thorough preparation of your business for a successful sale
• the best timing for going to market
• multiple qualified buyers – nationally and internationally sourced
• buyer competition
• the freedom to manage your business while we manage your sale process
• the “best fit” buyer for your company
• an experienced and dedicated advocate for your interests
• smoother negotiations and less stress
• successful completion of the due diligence phase
• realization of your true market value
• higher likelihood of a successful closing (our 86% deal closing rate is more than three times the M&A industry average)
• a smooth post-closing transition of ownership

To explore the successful sale of your mid-market business, for top dollar, to the best-fit buyer, contact an IBG Business M&A professional near you.