Avoid the "bad deal". Seller Beware!

I want to remind our readers, colleagues and friends of something very important.

Unscrupulous people will take advantage of others in times of crisis.

I have worked with and consulted for a number of founders and shareholders involved in corporate transactions; that is, buying another company or selling their company. Small and medium businesses alike can reach a point where the founder or shareholders believe it’s time to sell. . or to find an investor.

A few months ago, profits were easier to achieve. The Dow reached a new peak and business was generally prosperous. Private Equity groups and strategic buyers were in the marketplace acquiring smaller companies and competitors as part of their overall acquisition strategy. Then came the COVID-19 pandemic.

The cycle of business creation, maturation and particularly sale is not new. But in a post-COVID-19 world, it most certainly is different. Potential deals on the table stopped abruptly as businesses took a pause to safeguard their capital.

The new concern I have is what happens next as businesses try to reopen and survive? And what do business owners do if someone approaches them offering to “buy them out”?

To illustrate my concern, I’ll tell you a story.

I was engaged by a small company that was approached by a larger company for a buy-out. The large company sends a representative that appears to be in the middle of the transaction. He tells the small company that they want to offer them an opportunity to be part of a larger regional organization. Step 1: the small company must sell to the large company under certain terms and conditions. Step 2: the large company (now one with the small company) will sell up to a private equity group in the next couple of years. At that time, the representative says they will be worth several million dollars and can cash out and retire. Since the small company owners are over 10 years from retirement, this deal sounds great!

The representative wines and dines them, they meet the CEO of the large firm and are sold that they are now “part of the family”.

They were a couple of weeks from signing when they gave me a call. I met them, read the contract and this is what I found:

· The large company was offering a price for the small company that was about 67% below a fair market value. (I used similar sales of market, industry and size to compare). The small contractor was going to have to pay off any debts and keep whatever was left.

· The offer was an Asset sale, not a Stock sale. Without making everyone sleepy over tax talk, the small company would have paid about twice as much in taxes for the asset sale instead of the stock sale.

· The small company was not offered stock or ownership of any kind. They were about to become employees!

· If they did want some ownership in the next 1 or 2 steps to private equity, they would have to come out of pocket and buy the stock! Their intellectual asset value was deemed worthless!

· The large company offered to make the two individual owners of the small company leaders of a division. But they failed to offer an employment agreement. They were about to give up control of a company they built for over 11 years to an “at-will” employment arrangement. They could be fired at any time for any reason!

· Before I forget to mention, the small company had record performance year over year and they experienced an over 20% revenue jump from 2018 to 2019. So, there was nothing to compel them to make this decision.

I’ll cut to the chase; the sale was stopped. The small company owners were relieved and they made me feel like a hero.

So here is the analysis: really bad deals are going to happen over the coming months and year into 2021. Deals will happen and owners will give their hard work away for a pittance. And the pandemic will make it a feast for the unruly opportunists who show up with cash and contracts in hand and smiles on their faces. It is terrible and in many cases avoidable.

My advice: talk to your trusted network of friends and colleagues before making the decision to sell. This could be a once in a lifetime opportunity and you want to insure that you are rewarded for your success.

My Partners and I at Intellectual Capital Advisors believe that there are actions that can be taken to help businesses in our communities. Now is the time for goodwill and a revival of fair dealing. Give us a call so we can listen and advocate for you. We are in this with you.