COVID-19 & The Golden Rule – An M&A Tale

Nov 17, 2020

Two foundational pillars to IBA’s time tested business model which has successfully facilitated over 4200 transactions involving privately held companies and family owned businesses in the Pacific Northwest are the firm is a high performance sales organization and all brokers are expected to follow the Golden Rule in the representation of our sell side clients and engagement with buyers.

Evidence of our corporate culture that brings a competitive sports mentality to business sales are our 100% paid on performance business model and short duration listing agreement. IBA collects no fees or retainers from our sell side mergers & acquisitions clients regardless of if the project will have an enterprise value of six, seven, or eight figures.  From our perspective, if we pick our projects correctly it is always a matter of when not if a sale will be completed and we will be paid for our investment of time & labor.  It is public knowledge that our standard representation agreement is six months in length.  We willingly agree to this term because it is in the middle of our standard sale period of three to nine months for projects. It is our philosophy, that if we have not sold or put a business in escrow within six months, we need to request an extension from our client to finish the project. An overwhelming majority of our clients who reach six months without an identified buyer, happily extend based on our quality work product and superior customer service. Statistically, we sell 80 – 90 percent of our engagements annually.  As a firm we have continued historical productivity in 2020 in a COVID-19 world completing eight transactions in the last 60 days, having nine transactions in escrow pending sale, and three other clients in serious negotiations with highly qualified buyers.

The Golden Rule of “do unto others as you would want them to do unto you” is a guiding principle at IBA.  We employ this principal in facilitating “good faith” negotiations between buyers and sellers and in engagement with our clients, always asking ourselves if I was selling this business for a family member would I give my client the same advice.  Universally, the answer is “YES” at IBA.  There is no other way to provide quality, ethical business brokerage services.

The previous paragraphs were provided as a contextual prelude to a story from the field about one of the transactions IBA has been facilitating during the last couple of months.  I believe this story of a failed deal tells more about how IBA does business than one about the 1000’s of success stories we have participated in since 1975.

The transaction involved a company that in 2019 had gross revenues of approximately $15 million.  2020 revenues are on track to exceed 2019, but EBITDA will be down approximately 20% based on COVID-19 modifications required for operation, a likely non reoccurring event, and expense associated with the transition of ownership out of a couple of key management roles.  The initial agreement was reached between our client and a buyer at $8.2 million in a competitive marketplace with multiple succession options involving other qualified buyers interested in completing the acquisition available at the time.  Due diligence progressed positively in an environment of full disclosure facilitated by IBA employing best practices. At the conclusion of due diligence, the buyer returned to the negotiating table asking for a price reduction to $6.8 based on the 2020 performance of the company through nine months with an offer to close by the end of the year.

The new acquisition price proposal was deemed fair by IBA and our clients given 2020 financial performance, as was the $8.2 million price based on pre COVID-19 financial performance.  The $1.4 million dollar question on the table was what will be the value of the company in 2021.  Will the company return to its prior value as the COVID-19 storm recedes or will the additional expense burden be the new normal for the next year or two?

IBA’s guidance to our clients, the same as we would provide a family member, was the following options:

  1. A sale can be completed in 2020 for $6.8 million with a quality buyer who has negotiated in “good faith” and is likely an excellent successor in ownership.
  2. A sale could likely be completed for $7.5 to $9 million in 2021 or 2022 if revenues and profitability return to historical levels and top line growth trend lines continue into the new year.
  3. A sale could be completed for $6.5 to $7 million in 2021 or 2022, if the new normal continues forward into the future.

Which was the best one?  That was not our decision.  Our job is to present options and provide sage counsel based on our years of experience.  The timing for the sale also was not our concern.  Our goal was to help our client make the best possible decision given all available information.

The final decision in this case was to walk away from the table and let the deal die.  Financial analysis that influenced the decision included the following:

Sell Now Price: $6.8 million

2021 Sale Option (Conservative): $6.8 million + $1.6 million twelve-month EBITDA between deal death and future anticipated closing = $8.4 million transaction value

2021 Sale Option (Optimistic): $8.2 million + $2 million twelve-month EBITDA = $10.2 million transaction value

A deferred transaction was in the mutual best interest of IBA and our client.  The sale has been put on pause until more clarity related to COVID-19’s tenure impacting business operations is achieved.  Both IBA and our client believe it is not a matter of if, but when the sale will be completed.  The relationship remains strong and positive with a high probability of resumption in 2021.

The death of a deal is not a positive for a M&A firm. If IBA does not perform as a sales organization our business model does not work.  However, a professional service firm and a business broker only get one reputation.  All members of IBA’s team value our reputations significantly greater than any commission.  How many companies can make that claim and provide an example of how they did the right thing when it was to their financial detriment.

A common mantra at IBA is “No deal is better than a bad deal”.  If having a business broker with integrity, high skill, knowledge, and the ability to facilitate a transaction employing “best practices” in a confidential environment is desired to facilitate retirement as an entrepreneur in 2021, we would welcome the opportunity to provide an overview of our services.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate 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”.