Owner misses buyer’s stress, company sale falls through

By Jim Kendall

This column originally appeared in the December 1, 2014 Daily Herald

 

The sale of the business that would have sent owner Charles Evans into retirement with a wad of cash is dead. If there is any good news, it’s that what happened, and why, may provide insights for other entrepreneurs hoping to sell and retire.

That’s the intent, anyway, of Evans’ willingness to share his thoughts. I’ve chronicled his selling experiences twice before, with some blurring – Evans is a pseudonym, for example – to protect confidentiality.

Evans is alternately hard on himself for missing buyer distress signals and irritated with his sales team – although he has decided to stay with the broker as a second interested buyer enters the process.

“I don’t want to pay the start-up costs a new broker would require,” Evans says.

Evans’ now 18-year old suburban business continues its long profitability run. There still are 25 employees; none, except the two-person management team, have been told about the sale.

Selling to the management team was Evans’ first choice, but the duo couldn’t find financing. No family members are interested in the business.

That’s the update. Here in a pretty much unadulterated conversation is the current situation:

Evans admits he was blinded by upfront cash. “Don’t count your chickens,” he says somewhat ruefully. “I let my responsibility to monitor buyer due diligence slide because the upfront money was really good. I should have demanded buyer financials.”

Two potential buyers had submitted letters of intent, serious indications of interest which provide a 90-day exclusivity period for the chosen buyer candidate. Evans accepted the letters as submitted. But now he says to selling entrepreneurs, “Negotiate the LOI.

“If you don’t like something at that stage, you’ll like it less in the purchase agreement.

“Understand your broker is interested primarily in completing the deal so (the broker) gets paid. The broker told me the buyer had money, and I accepted that. I was looking at the price.

“They did no due diligence on the buyer, because they ‘knew’ him – although they had done no deals together.”

The 90-day negotiation period began.

“Listen to what’s being said – and not said,” Evans says. “I didn’t hear the buyer’s stress. If I had been listening, I would have known he was stretched and maybe couldn’t do the deal. He even told us he was having trouble with the financing.

“You must get a personal financial statement from the buyer,” Evans says. “I didn’t, because I was told the buyer had money.

“Lenders will dictate the conditions of the note (financing),” Evans continues. “They want the buyer to have enough money to keep the business afloat while he’s paying off the note.”

Eventually, however, the bankers pulled out: Evans’ company’s finances are okay; the buyer’s numbers didn’t work.

With another buyer interested, Evans turns reflective. “Reevaluate what you really want,” he advises. “How much money do you really need?” And, he says, “Have a fallback position.”

 

© 2014 Kendall Communications Inc. Follow Jim Kendall on LinkedIn and Twitter. Write him at Jim@kendallcom.com. Listen to Jim’s Business Owners’ Pod Talk at www.kendallcom.com.

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