Earlier this year a wealth advisor contacted me. He had a client who had taken over executive management of a successful, multiple decade old business in Seattle with several divisions when her spouse passed away. The business had excellent middle management in place and had continued operations successfully after the death of its President & CEO, however his widow did not have the same passion for the business and decided she wanted to facilitate a transition of ownership over time to downsize her executive management responsibilities and transition business assets to passively managed assets her wealth advisor could oversee for her and in the future her estate. IBA was enlisted by the wealth advisor to help assess the situation and offer strategies to help his client achieve her goals. It was determined that as a first step it was best to spin off and sell one of the company’s divisions. The division was valued at $700,000. The business also owned the real estate the business occupied. An assessment of this real estate asset valued it at $2.8 to $3.0 million. This created a problem. If the division was sold, it would need to stay at the present location or experience disruption of the business model and an expensive tenant improvement buildout to recreate the business model at another location. An additional problem with selling the business was that the rent would need to be subsidized long term, at rates similar to what were currently being paid, to keep the business model viable and a long term lease provided to the buyer to facilitate financing with a ten year term SBA backed loan. A decision was made to sell the real estate, close the business location, and migrate customers to an alternative location, as much as possible. The commercial real estate sold in May 2019 for $2.9 million.
This is an excellent example of a situation where “No Deal is Better than a Bad Deal” when selling a business. On face value, it does not make sense to close a business that is worth approximately $700,000. However, when it was determined that the value of the real estate was approximately $3 million dollars and it could generate over $400,000 per year in rental income for a developer in an alternative use, it did not make sense for the owner to commit to a ten year lease term at a starting rate of $5000 per month and have future concerns related to whether a successor could be successful with the business. IBA as the oldest business brokerage firm in the Pacific Northwest serving the middle & main street marketplaces has a reputation built over nearly a half century for providing our sell side clients with the same advice we would provide family members. All counsel is provided from a foundation of honesty, experience, and knowledge with the “best interest” of the client as the focus. It is generally done without compensation as IBA’s business model is focused on compensation for performance upon completion of a transaction versus the collection of retainers, administrative, or consulting fees.
The example provided is an unique one where advice was given to “walk away” from a potential business sale. The following are several of the more common ones where engaged in negotiations we have counseled our clients to consider walking away from a potential deal:
- Price The most common reason to walk away from a deal by a seller or buyer is because the price is not satisfactory. As a sell side representation firm, IBA knows the general market value for a company it has been engaged to sell (Businesses traditionally sell within 10% of where we first bring them to market). One of IBA’s jobs in a transaction is to remain level-headed and assesses all options at all times for our clients, including walking away from a deal to pursue an alternative buyer. The last thing we want is for our client to make an important business decision based on emotion. We also want to maximize the value paid for a business for our client knowing the value they receive and the commission IBA receives will both be impacted by the end results of the negotiations. Recently (2016) a company IBA was representing for sale to facilitate retirement by a client had multiple offers on the table to purchase the business. The company was also showing significant growth in revenues & profits at the time. A decision, advocated for by IBA, was made to pull the business from the market, file another corporate tax return, re-evaluate the business, and then return to the marketplace. After execution of the strategy the business sold for several million more in 2018 in a deal facilitated by IBA than it would have in late 2016 or early 2017. We also recognize that often “top dollar” is not always the driving goal for a client. We have seen clients leave dollars on the table to sell to a preferred successor or facilitate retirement on their desired timetable.
- Financial Terms One of the goals of a professionally facilitated “win-win” transaction for an intermediary is a “fair” allocation of financial risk between the parties. On the buyer side, the risk is quantified in the liquid capital they inject in the transaction and their assumption of liability to lenders and/or investors. On the seller side, financial risk can take the form of subordinated debt to acquisition financing and/or contingent compensation based on the future performance of the business. It is important for both sides of the transaction to evaluate the risk associated with all financial components thoughtfully from a foundation of knowledge. All deals have elements that parties do not love. A common definition of a “fair deal” is an agreement where both parties feel they gave a little too much in negotiations.
- Representations, Warranties, & Indemnification One of the most important components of the legal documentation associated with a mergers & acquisitions transaction is the verbiage related to representations, warranties, and indemnification. It is my belief that the seller should take responsibility for what occurred while they were at the “helm of the ship” and the buyer should not ask the seller to be financially responsible for their management decisions and ability The reality in a business sale is the one thing that cannot be sold is the executive management ability of ownership. Future success of a business will be greatly impacted by the buyer’s ability as an entrepreneur, however known issues at time of sale should be disclosed so the acquisition of the company occurs in “sunlight” in an environment of transparency. Representations, warranties, & indemnification address this issue legally. It can be prudent for parties to “walk away” from a transaction, if satisfactory legal verbiage cannot be negotiated. Due diligence where an environment of “full disclosure” is not created or legal documents with poorly drafted warranties & representations can end up in court at a future date. A “lose-lose” proposition for both the buyer & seller in a business sale transaction.
The goal of a professional mergers & acquisitions intermediary is to be a “dealmaker”. The ability to problem solve and offer alternatives to keep the transaction progressing to closing based on knowledge & experience is what separates the “best of the best “ in business brokerage from people who want to play or learn the M&A game. Periodically, the best decision is to “walk away” from the table and start over on a business sale. This decision should not be made lightly, but can be the correct choice at a given place & time. I have successfully facilitated over 300 transactions personally over the last 25 years, sometimes to quote Howie Mandel on the game show “Deal or No Deal”, my advice to my clients is “No Deal”, luckily 3 – 7 times a month at IBA we are instead saying “Deal” and celebrating the achievement with a happy client.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community 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”.