What Happened?

The offer was not expected. Bruce (not his real name) was surprised when he got a call from a respected private equity (PE) professional asking if he could fly from Chicago to have lunch. “If he wants to fly down just for lunch, I thought I should hear what he had in mind,” Bruce told me during our first phone call. As it turns out, the PE guy’s firm already owned a company in St. Louis much like Bruce’s, and the PE group was searching for strategic add-ons.

Calling me on the recommendation of his longtime CPA, Bruce knew an offer from the PE group was imminent. After we talked, we concluded there was nothing we could or should do until we heard back from the potential buyer. A couple of weeks passed with no word from the PE firm. Bruce called me again and I could tell his excitement was turning to annoyance. “They get me all excited about doing a deal then I hear nothing,” he said.

Lo and behold, about a month later Bruce called to tell me he received an email from the PE guy with the basic outline of a deal. It wasn’t exactly what Bruce was hoping to see, but we both thought the offer was likely within striking distance of acceptable. At that point, Bruce retained me to officially represent him in the negotiation. This was June 2022.

Over the next couple of weeks, I went back and forth with the buyer to get the offer closer to what Bruce wanted. Finally, in mid-July we received a formal letter of intent on terms (LOI) acceptable to both parties, with just one hitch. The buyer was simultaneously working on three other transactions, so the terms of their offer were to close the acquisition of Bruce’s deal in mid-Q1 2023. While somewhat disappointed with the timing, Bruce and I both felt this was the best offer we could get, so he signed the LOI with the expectation due diligence would begin toward the end of 2022.

Thanksgiving 2022 came and went without a word from the buyer. I called the buyer in early December, and he explained getting the other deals closed had taken more time than they had hoped. But he assured me they wanted to close on Bruce’s deal in early Q2 2023. Then I heard what I hate to hear, “Jim, with the quick rise in interest rates, we might have to look at the terms of our deal.” “I can’t promise Bruce will do a deal different from what we all agreed to in July but send it to us and we’ll have a look,” I replied. “It will have to be after Christmas,” he said, “we’re still trying to figure out what’s going on in the capital markets. But hear me, Jim, we very much want to do this deal.”

Two days later Bruce called to tell me he had received the revised offer and his first words were, “What the — happened?” The revised offer had the same valuation, but the terms were dramatically different. We went from 80% cash/20% rollover to 55% cash/25% rollover/20% earn out. It doesn’t take a Vanderbilt math major to see what the buyer was trying to accomplish; they were lowering their risk.

Bruce has decided to not do a deal based on their revised terms. We might take the business to market later this year or early next year, or the buyer might have a change of heart and go back to the original offer.?

I have seen several versions of this over the past six months. Rising interest rates, fear of recession, and stock market uncertainty have all contributed to overall buyer nervousness. While valuations aren’t being dinged yet, buyers are stingy with how they’ll release cash. But like all trauma, this too shall pass