Lessons for Death
4. If you have to sell your business, take the first and fast buck, not the last buck.
When a company is troubled, generally the first purchase offer they receive is the best offer. Why? Because it’s losing money. As it continues to decline, the best employees will leave, good customers will start to fall by the wayside, and credit terms from suppliers will tighten up. Pressure will mount on the company from every side. Soon, competitors will move in to completely bury the company. The longer you wait, the less value you will have. If the company is in a negative cash-flow position, generally the sale price will be close to the value of the assets—that’s it. Those glory days of closing dinners with investment bankers are gone. Most failed companies that have been around for a long time were once successful, and someone would have purchased them at their peak, but the owner refused to sell because they wanted more. Many of my clients all thought the same thing: “a better offer is out there.” There never was. Remember, you don’t have the money until there is actual cash sitting in your bank account. Take that first and fast buck and move on with your life.
Task: Make a list of companies or people that may want to buy your company. This may be the most difficult part of the process—putting your ego aside and claiming defeat to your competitors. If you care about all of the people that helped you build the business, you will rise above it and be noble. It may be time to sell to your competitor. Letting them in through the front door to analyze your business and your books may infuriate and crush you, but you may not have another choice.
Your investment banker will concurrently put together a list of other investors. They may be financial or strategic investors who are looking to expand their markets. If you are at this point, you have to run with all suitors.
Caution: Be wary of the overly generous offers at the beginning. LOIs (letters of intent) are just expressions of interest—nothing more. Examine the offers for their “outs.” Oftentimes, shrewd investors will put in a high offer to muscle out others at the beginning of the chase. Their goal is to narrow the field so that you are left with few or no choices other than them at the end. At that point they will make “closing adjustments” to the offer. All of a sudden, the value of your business will drop dramatically. Always try to keep as many people in the chase as possible until the very end. Have prospective buyers commit to a “back-out fee”—a fee that they have to pay if they back out of the deal before the sale of the company closes.
Also, incentivize your investment banker to earn more for a higher sale price. Often, investment banking deals have higher percentages on the low bar and they decrease as the price increases. This helps them recoup their time invested in the deal at a lower level and also makes the client feel that they are not being gauged at the higher level. However, I believe it just sets the bar too low. More money and more pay should be the goal for both seller and investment banker.