As a merger and acquisition specialist focusing on the industrial and energy sectors for the past 20+ years, I have experienced several boom and bust cycles. Over this time, I have worked with a number of clients who successfully sold their business for substantial values when the sector was healthy and outlook favorable.
There are other clients, however, who missed the window of opportunity to close a sale transaction as the industry started into a cyclical downtrend. They either did not appreciate the risk of an industry downturn, or they believed their company would do just a “little bit better” in the near future (and command a higher valuation), or they wanted to hold out for a “little bit” more value or a higher earnings multiple.
Sadly, as the industry turned down, these clients watched their business trends turn negative. This occurred during the same period in which we were helping these clients close a company sale transaction. And the various transaction opportunities we were evaluating at that time, completely evaporated. When macro and company trends turn negative, buyers back away.
Unfortunately, for these clients, the costs of NOT executing a sale transaction are extreme. Let me give you a specific example (which is representative of many of these situations).
Here’s the Background
Assume Mr. Smith owns a very good manufacturing company that had grown operating profit from $6.5 million to over $10 million over the previous three years and the company’s trailing 12 month operating profit was $10.2 million at the time in which we were marketing the company for sale. After marketing the business to our targeted buyer group, we had received eight credible bids to buy the business. After further discussions with prospective buyers, management presentations, and buyer due diligence, we had negotiated the best deal with one buyer. The deal value was $56 million. Then we gave the buyer an exclusivity period to close the transaction.
The industry began to trend down. The buyer expectedly became very nervous and backed out of the deal. We tried to resuscitate the situation, but the cover bidder and third place bidder had no interest. All buyers evaporated. No deal. No $56 million. The good life our client had envisioned for himself after the sale closing, evaporated, too.
Fast Forward to the Current Situation
The good life our client had envisioned has turned into a downright grind. He has had to scramble, like many in the industry, to cut costs to the bone, terminate employees, drop prices significantly to retain business from customers (some went with cheaper alternatives anyway). He has also had to deal with his lender while watching his personal compensation and capital shrink month after month.
Fortunately, the business eventually stabilized, but operating profit dropped to less than $4.0 million.
The Extreme Costs of NOT Selling When the Time is Right
If we were to try to sell the business today (assuming we could garner buyer interest at the current anticipated valuation multiple), our client could possibly achieve a valuation of $20 million.
Compared to the $56 million we had negotiated, that is a $36 million drop in value (64% decline)! That is the extreme financial cost of NOT selling your business when the window of opportunity is open.
Additionally, there are psychological and other costs as my client has the following questions that are lurking in the back of his mind:
- How long will it take for the business to get back to the performance level it had previously?
- How much capital will the business require to get back to performing as it was previously?
- How much effort will it take to get the business back to previous levels?
- Will the business ever get back to that level?
- Will I be able to ever sale my company at a reasonable value?
Take Advantage of the Window of Opportunity
I have advised various clients in cyclical businesses before…if your goal is to sell your business, liquefy your holdings, remove significant future business risk and begin to live the good life you had envisioned, then when a credible buyer has offered you a reasonable deal, take it!
The window of opportunity to consummate a favorable company sale can close very quickly. All possibilities evaporate. The costs of NOT selling are extreme!
Several clients in a similar situation have asked me somewhat in gest, but not really…”Jason, why didn’t you make me sell? Next time, I will take your advice to advance the deal and get it closed. Don’t let me think twice!”
I think that advice is spot-on. Now will future clients listen?