I have had numerous calls from clients who are looking for guidance as they are receiving calls from buyer representatives for Private Equity Groups.
The Scenario:
A buyer or buyer’s representative makes direct contact with the business owner, or one of their employees, via a cold call. Or perhaps the owner meets them at an event–golf comes to mind.
They inquire about buying the business. They ask a lot of questions and they may get really chummy and wine and dine the owner. They will ask for unadjusted suppressed financial statements and lots of information about the business.
Note that most privately held business owners run their business to show the least amount of profit in order to mitigate taxes. If an owner hands over unadjusted financials to support the value of the business, they have just given this buyer all the fuel they need to steal the company. For example, if the business has $500,000 of positive adjustments to EBITDA for discretionary or non-recurring expenses and the business were to sell for 4X adjusted EBITDA the owner would have missed out on $2,000,000 in value.
Go to my book, Master Your Exit Plan, page 50, to read about such a scenario. This particular business owner was approached directly by a buyer and their wealth manager referred the owner to us. We ran a formal Mergers and Acquisitions process, resulting in a final price that was 42% higher than what the buyer who contacted him directly offered (that buyer dropped out of the process btw) and terms we negotiated saved him over $1MM in taxes.
Following the M&A process by engaging with multiple buyers matters!
It feels good for someone to take notice of your company and see value in it. Maybe, “this is my buyer,” you think, but in reality…
Buyers are very motivated to go directly to a business owner in search of what we call a proprietary deal. No competition. Without advisement and following the proper Mergers and Acquisitions process, a business owner will not receive full value for the company. In addition, future risk in the deal and the tax impact will not be mitigated.
Today, the vast majority of privately held business owners have been contacted directly by a buyer – thanks to the availability of your contact information on the internet. You are not unique and most likely the person who has contacted you knows nothing about your business because it is “private.” You are not a public company with data easily obtainable. They may even have your sector wrong! “Dialing for dollars” we call it.
The Risks in Engaging Directly With A Buyer or Buyer Representative Include:
- Lack of Expertise – Private Equity Groups are very sophisticated. Recognize their business is buying businesses so you are not on a level playing field. You are an expert in your business, not in mergers and acquisitions, so your lack of expertise puts you at a major disadvantage. You need expert representation.
- Void Confidentiality – Without a Non-disclosure Agreement (NDA) in place and understanding confidentiality protocol, you risk seriously compromising your business. If your customers, vendors, employees hear that you are selling the business the value of your business can be diminished. Competitors may try to hire your employees, and your employees who may be concerned about working for a new owner, may go. Vendors may be concerned about the timing of the sale and shift terms to “due upon receipt,” causing a cash flow issue. Customers may be uneasy and shift to a new vendor or service provider. In addition, you or your employee, may unwittingly say something that could compromise a potential deal by speaking directly with a potential buyer.
- One Buyer is No Buyer – A formal M&A process will ensure that your business is presented to a broader market which will result in maximizing the value of your business. It is also critically important that every buyer be vetted to ensure they are financially capable and genuinely interested in purchasing the company. In addition, risk must be assessed. For example, if your deal is structured as a recapitalization and you are rolling equity into the new entity, it is important to assess the associated risk of this new investment. What is the capital structure of the new entity? How much leverage is there? Can the future cash flow support the debt?
- Business Value – Without a valuation of the company for purposes of a transaction, an owner has no benchmark to determine if an offer is fair. The first step in preparing to sell your business is always a valuation so that you have a baseline to compare offers. A valuation also provides an opportunity to correct any weaknesses that are diminishing value and marketability prior to going to market.
Selling a business is a complex and time consuming process and requires an excellent team who will provide top-tier M&A, legal, and tax advisement. By engaging in the process correctly you will not leave money on the table and will meet your business, financial, and personal goals.
When our clients receive a call from potential buyers they simply forward the information to us. We vet these potential investors and build the buyer pool in advance of going to market.
Our team here at Legacy have mountains of experience and we are here to protect you every step of the way.
