One of my favorite books when I was a child was Alexander and the Terrible, Horrible, No Good, Very Bad Day by Judith Viorst (https://youtu.be/6hukeHQah4U?si=sT1IU5OjoFLzLXqw). I believe it was intelligent parenting by my mother to introduce me to the book and the concept that often things can go wrong in your world due to no action of your own at a young age. As I have aged, my view of bad occurrences has evolved. Today, when I am presented with unforeseen challenges, I view them as opportunities to learn, problem solve, and reaffirm my faith.
Business brokerage is a sophisticated, nuanced profession requiring a high level of knowledge, experience, and skill to be consistently successful. I am honored as a professional M&A intermediary to have gotten parties to “YES” and closing in over 300 transactions personally and to have supervised 1000’s of positive “win-win” deals in an executive capacity at a firm, IBA, that has sold over 4300 privately held companies and family businesses since 1975.
I have also experienced and been witness to days in the business brokerage profession when there has been optimism and momentum before a storm arrived and rain destroyed a sunny day (https://youtu.be/g4flAZEgtjs?si=AzJH12HWMmW7Rzd6). The following are some examples of situations experienced at IBA where in some cases IBA was able to navigate around obstacles and complete transactions and others where the transaction ended up an unfulfilled dream of a buyer & seller either because one withdrew from negotiations, or a third party torpedoed the deal.
Accounting Shell Game
It has been said that there is a fine line between the mind of a genius and a criminal. The difference between the two is whether intelligence and execution ability are used for positive achievement or personal reward ungoverned by a moral/ethical compass. It is often parties that people trust that do the worst things. Multiple years ago I personally experienced this dichotomy in representing a client in the sale of their business. My client was a politician running for mayor of a suburban town. His vision and execution plan for the municipality were positive. I enjoyed my conversations with him about business and governance. He was a respected local entrepreneur owning several businesses. I was approached to sell one of them, a profitable manufacturing company. Our collaboration during the sale process was like Gus Williams & Dennis Johnson (https://youtu.be/fDkpZ1EY0bI?si=4b_prxex3MkeYHLh) in leading the Sonics to their NBA Championship. Numerous buyers met with my client and a premium sale price was achieved in successfully negotiating agreement on a Letter of Intent. Due diligence commenced. The tax returns were in order and financing secured. The buyer asked for and received an accountant’s backup copy of QuickBooks and started to set up a chart of accounts to facilitate a smooth transition of ownership. Drilling into historical figures in the expense categories, questions started to develop. Why were utilities paid only 8 out of 12 months? Why were primary suppliers paid so sporadically? Trust in the numbers started to erode. Forensic accounting ultimately determined that the seller diverted expenses for the business to another of his companies to enhance profitability and the sale price for the business, an action which did not defraud the IRS because the two companies combined in terms of federal taxes on the individual’s 1040. The buyer with me right behind him walked away from the deal. The experience should serve as a cautionary, advisory tale for anyone buying a business from someone owning more than one LLC or S Corporation.
Bad Luck and Financing
IBA was born in Portland, Oregon in 1975. It is a city that we have served as a business brokerage with honor, skill, & diligence for almost fifty years. It has pained our firm to see the deterioration of the Rose City this decade and the rise of crime in its city limits (https://www.dailymail.co.uk/news/article-13100463/portland-crime-homicide-defund-police.html). As a company, we have elected to keep our Oregon headquarters in downtown Portland. Our office is only a stone’s throw from the Hatfield Justice Center which was the scene of numerous days of attack by violent, destructive mobs (https://youtu.be/yzG1IWkznNQ?si=DWM8Es7dLJOp1rT1). In this environment, IBA was asked to sell a beloved, multiple location retail business. A quality buyer was found for successor ownership of this multiple decade old company that had been run profitably by a family for multiple generations. Due diligence was completed without issue. Legal documentation executed. Leases assigned. Financing secured. Then a hand grenade was thrown into the deal. A customer of the store was observed shoplifting by staff. The incident was recorded on video. Third party security was called to remove the individual from the store. Security arrived, asked the party to empty their pockets, the party refused, and was removed from the store. End of story. Not in this case. The party accused of shoplifting hired an attorney and accused the business owner and security company of discrimination and physical harassment. The buyer fully disclosed of the situation desired to proceed and complete the acquisition. The lender paused. Their counsel did not want to fund a transaction with open litigation. Problem solving and persuasion commenced by buyer, seller, their legal counsel, and IBA with the lender. After a slog through the mud, the transaction was completed. Broker Note: Selecting the right lender to finance a deal in terms of a direct contact professional and institution is critical for success. He who possesses the gold makes the rules. That should never be forgotten.
As an example of this rule, numerous years ago I was selling a vocational training school. The buyer and seller had agreed on the terms of sale and a strategy for the transition of ownership. The business owner was counting their days to retirement and the buyer was excited about starting a new chapter of their professional life. The calendar year changed a digit. The bank changed its underwriting policies on January 1 from the terms which resulted in approval of the buyer the previous year. The loan was rejected because it was now a square peg trying to fit in a round hole. Appeals from the buyer, the seller, their legal counsel, and IBA fell on deaf ears. The seller lost faith in the buyer because they had selected the wrong lender and was now asking for permission to start the financing process over. Another lender was motivated to step in and save the day. The seller did not care and proceeded down another path to facilitate retirement. The losing party was the previous buyer. To this day, this situation bothers me. The buyer was a wonderful person who was simply a file in a large bank’s system. I have personally never done a deal with that bank again based on their heartless treatment of a quality individual and lack of willingness to stand behind their previous word.
Non-Alignment of Interests
In a good faith negotiation between a business seller and buyer, the parties’ interests are aligned. The business owner wants to sell, and the purchaser wants to buy the company. All that needs to be done is for the price & terms of the transaction to be negotiated. However, in a business sale there are additional parties external to the sale with vested interests in the outcome. These parties can be deal killers. Two of the common external parties that can impact a transaction are the landlord and employees. Landlords frankly do not care whether a deal is completed or fails. They are interested in protecting their return on a real estate investment and maintaining positive occupancy of a space. The status quo is fine for them, and in fact may be preferred because the present tenant is time tested. More than a few deals have died at IBA because a lease could not be assigned or extended. This knowledge makes it prudent for a business seller to engage a real estate licensed broker with knowledge, experience and skill facilitating lease negotiations (https://ibainc.com/blog/gregory-kovsky/six-reasons-it-is-prudent-to-engage-a-business-brokerage-firm-with-licensed-real-estate-professionals-to-sell-your-business/) and thoroughly vet a buyer’s signature power before reaching agreement (https://ibainc.com/blog/gregory-kovsky/why-a-business-owner-should-review-the-buyers-personal-financial-statement-or-balance-sheet-before-starting-negotiations/).
It is also a known fact that there is no slavery in America. The sale of a business can be emotionally & mentally difficult for a company’s employees. Many buyers correctly want to obtain assurances that key personnel will stay with a company after a transition of ownership prior to acquisition. This engagement with the staff of a business by a buyer can create a leverage point for employees for negotiation of compensation and other employment terms. Knowledge, experience, and skill possessed by a M&A intermediary in this area can be the difference between successful deal completion and transaction failure over employee retention.
It is my recommendation that any business owner considering hiring a M&A intermediary to facilitate the sale of their company interview several business brokers before selecting one for the project. Two of the questions that should be asked of the business broker are What was the most difficult transaction you successfully facilitated and what did you learn from the activity? and What was your most frustrating transaction you lost and why did it fail? A person learns more from life’s challenges and adversity than successes. There is no replacement for knowledge, experience, and skill in the professional facilitation of th sale of a business. If you are thinking about selling a business in 2024, please contact IBA and learn why we have sold more companies in transactions employing best practices than any other firm in the region.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, legal, and accounting communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.