Here is a story on how inexperience can ruin a deal when selling a business.
The owner of a multi-location retail operation decided to retire. He was doing $30 million in annual sales. After interviewing a highly recommended intermediary, he was impressed. However, he had a nephew who had just received his MBA that said he could handle the sale and save him money. The nephew said he would do it for half what the intermediary said he would charge. The uncle decided to use his nephew. The nephew had received his education at one of the top business schools, but had never been involved in a middle market deal. He was confident he could “do the deal” since he had read a lot of case studies.
Inexperience #1
Both the owner and the nephew agreed not to bring the CFO into the picture, nor execute a “stay” agreement. The nephew thought he could handle the financial details. Neither the owner nor the nephew realized that a potential buyer would expect to meet with the CFO when it came to the financials of the business. Nor did they realize that a potential buyer would certainly expect the CFO to be involved in the due diligence process.
Inexperience #2
It never occurred to the owner or his nephew not to reveal the name of the company to prospective buyers. Revealing just the name of the company sent competitors and only mildly interested prospects to the various locations. Confidentiality Agreements were never mentioned. No time limits were set for offers or even term sheets since the owner was in no hurry to sell. It would only be a matter of time before the word that the business was on the market would be out.
Inexperience #3
The owner wanted to spend time with each prospective buyer. Confidentiality didn’t seem to be a concern. There was no screening process, no interview by the nephew.
Inexperience #4
The nephew prepared what he thought to be an Offering Memorandum. He put some unaudited financials together, including a missing $500,000 that the owner took and forgot to inform his nephew. Obviously, this impacted the numbers. There were no projections, no ratios, etc. This missing information would likely result in lower offers or lack of buyer interest. In addition, the nephew hid the mention of a pending lawsuit in the Memorandum.
Inexperience #5
Both the owner and the nephew decided that the company attorney could handle the details of a sale. Unfortunately, the attorney never had any involvement in a business sale transaction.
Results
The owner was placing almost his entire net worth in the hands of his nephew and an attorney who had no experience putting transactions together. The owner decided to call most of the shots. Any of these “inexperience’s” could ruin a sale and create the possibility of a leak. The discovery that the company was for sale could be catastrophic, whether discovered by a competitor, an employee, or a major customer or supplier.
Guess what? The facts in the above story are true!
The moral of the story, when considering the sale of a major asset, it is foolhardy not to employ experienced, knowledgeable professionals. A professional intermediary is a necessity, as is an experienced transaction attorney. If you are in need of an experienced intermediary, contact EBIT Associates.