Business Sale: Where do you turn when someone makes you an offer you can’t refuse?

Your business is growing nicely, profits are good and, with some simple tax planning, you enjoy a generous dividend instead of overtaxed salary. Your accounts could be easily produced on the back of a fag packet, although you have graduated recently to putting them on Sage after years of being on a spreadsheet. All is right with the world.

Then someone knocks on the door and makes you an offer which could make you and your colleagues millionaires. It sounds attractive, but when you look at the deal in more detail you realise that there is very little jam today, and that you will be giving up your independence in the hope of an earn-out in the future – and we all know that the track record on teams achieving earn-outs is pretty dismal.

This was the scenario that greeted one of our clients last September. Actually they weren’t a client at the time, but fortunately they knew someone who knew us. So what did we do?

First, we established that the offer had no real substance. However, we were able to identify another party in the same sector who already knew our client and was on the acquisition trail with venture capital backing.

The owners had already decided that time was right to seek the exit, so all parties quickly convened at our client’s offices. A decent cash offer was immediately tabled on the back of some robust management accounts – by that time we were five months into the current year – and, after some haggling, we got it to a very full cash offer. Not a bad morning’s work.

Then the difficulties hit. The management figures, prepared by an external accountant and believed to be actual by the owners, comprised actual revenues (which appeared to be growing nicely) but estimated costs and margins based on historic actual performance. When actual costs were subsequently produced, it transpired that actual margins had slipped significantly against historic. There was no way of comparing performance by month year on year because the accounting information simply didn’t exist in comparable form. Timing of invoicing bore no relation to the provision of the service offered. Also, it appeared that some of the previous year’s revenues had been invoiced in the current year, so actual current-year revenue was overstated.

In short, a simple due diligence cast significant doubts over the numbers to the embarrassment of the external accountant who had prepared the figures in good faith but hadn’t done any sort of audit. Much time was spent trying to get behind the figures, looking at business mix and margin by customer. All this did was reduce the buyer’s confidence in any numbers being produced.

We advised our client to break off negotiations to allow breathing space, but the purchasers were adamant that they wanted the deal. They offered a reduced but still significant cash sum, and an earn-out target over 12 months which would allow our clients to achieve the original offer and some more.

Bearing in mind the reservations regarding earn-outs, we managed to structure a ‘no-interference’ clause in the agreement. The negotiations started in September and the deal was completed just in time for Santa to deliver a seven figure sum to at least one of the vendors. That’s a fairly rapid transaction.

If the opportunity had been there, we would have done several things differently which, almost certainly, would have allowed the vendors to achieve a higher price. However, the major shareholder was keen to sell for personal reasons and was prepared to compromise more than he might have done otherwise.

A glowing testimonial
We received the following testimonial from our client.

• Many people set out in business with the objective of selling it some time in the future. At the beginning, this scenario seems a long way off so little attention is paid to it. After all, you have a business to grow. When eventually an opportunity to sell arrives it usually takes you by surprise, so you are still unprepared. At that point – or sooner if you are better organised than we were! – you need the help of specialists. Nothing can prepare you for the roller-coaster ride that lays ahead, the game playing, the teasing, the carrots and the sticks.
• We were fortunate to have the help of the team at EMC. Without them we would not have survived the course and clinched an acceptable deal – a deal which set a business value comparable to the hard work we had put in over the years.
• Post-deal we continue to use EMC’s services. They are professional, courteous and friendly but, importantly, can present a firm side and tough stance during negotiations. You will need them in your corner, believe me. It is a fine line between driving a hard bargain and scaring your potential purchaser away. Even worse would be selling out too cheaply. For us the EMC people walked the tightrope, helped us to make the deal but allowed us to keep running the business throughout the negotiations. I cannot recommend them highly enough.”