[The full version of this article appears in the Q2 2012 Outsourced Business Services Sector Report. Click here to download this report.]
The story is eerily similar each time I field a call from frustrated agency owners who decided to walk down the road toward selling their business with a buyer that approached them directly, only to have the transaction fall apart before closing. It wasn’t unusual for buyers and brokers to solicit them directly about selling their business. Usually they don’t respond but this time around they chose to respond positively. One initial call led to a face-to-face meeting. Before too long, they executed a confidentiality agreement, shared financial and operational information, and brought the buyer in to meet their staff. The price and terms were set so they executed a Letter of Intent granting exclusivity to the buyer. They were sure the deal would close.
The deal hit some turbulence in the first 30 days when the buyer expressed disagreement with specific add-backs that the partners included when calculating their company’s adjusted EBITDA. The deal quickly unraveled right before their eyes and the partners were left explaining to their management and clients why the sale did not go through. The worst case scenario became their reality.
The owners made some serious, and avoidable, mistakes when they decided to sell their business to the unsolicited buyer that approached them directly, including:
The owners moved too quickly. What was the big rush for the seller when it came time to sign a letter of intent? For the buyer, the timeframe is different. Most buyers want to execute a letter of intent as soon as possible and effectively remove the seller’s negotiating power by giving them sole right to pick over the seller’s business without competition applying pressure to the price or process. In this case the partners had built a successful business over 2 decades but hastily jumped at signing the LOI before making sure important matters like adjustments to EBITDA were negotiated and firmly set.
The owners involved clients too early in the diligence process. In this case, the buyer convinced the partners to allow them to meet with major clients early in the diligence process to discuss the sale and ensure continuity of business. This should never have occurred until terms of the definitive agreement were firmly set and financing was secured.
They did not set controls for diligence process. The buyer dictated when they would be at the company conducting their due diligence, who they wanted to meet with and what information they were to receive. The sellers should have set firm visitation hours, disclosed their vacation schedules so as to preserve peace on the home front, and conducted information reviews either in an on-line data room or at counsel’s office to avoid unnecessary disruption.
They never did reverse due diligence on the buyer. The seller assumed that since they were approached by a private equity firm, and since the firm owned a large RCM company, the buyer was reputable and financially strong. Remember what happens when you assume? They should have done homework on the buyer, including past sellers they either completed or did not complete transactions with, before signing the LOI.
The owners prematurely told their entire staff about the sale. This is a big no-no. Would you tell your kids that you’re going to a ballgame before checking the price of the tickets or if they are sold out? I wouldn’t. Why would you concern your staff prematurely about a potential sale, especially in today’s troubled economy, before making sure a transaction is eminent? It’s perfectly reasonable to allow the would-be buyer access to senior executives but not to the rank-and-file personnel.
It’s captivating to get an unsolicited offer from someone who wants to buy your business. By avoiding key mistakes, owners will maintain leverage throughout the negotiating process.