Case Study: 1

The Greed Factor

Sometimes a seller is overly optimistic about his company’s potential and begins to feel that he may be selling himself short on total consideration and the terms of payment. One seller under a Letter of Intent (LOI) became somewhat greedy during the buyer’s due diligence process.Se At the time, the seller’s sales were flat and he insisted that the closing be postponed to include another quarter of sales in the hope of enhancing the purchase price. We cautioned him about the possibility of losing his spot in the buyer’s queue and the possibility, however remote it seemed at the time, that sales would remain flat.

But the seller was too optimistic. His sales fell, margins were squeezed and profits diminished significantly. Our ever-hopeful client said, “Let’s wait another quarter.” We know that a seller never wants to leave money on the table, and we caution against this as much as anything else, however it is often wise to play out the hand as dealt, because there is no assurance the next hand will be any better. In fact, this client’s sales dropped again and he decided to go forward with the deal. At this point, the buyer had a much bigger deal in its grasp and had put all other deals on hold. Our client became apprehensive because the terms the buyer had offered were so attractive that the offer was by far the best available to him. Now he had to wait for the

buyer to go forward. Sadly, the client lost his priority in the buyer’s queue. As the economy continued to weaken, more buyers decided to remain on the sidelines, and our seller had far fewer options than before. In the end, the client sold to the same buyer ten months after the last delay – for less cash, more stock and about the same total consideration, even though the seller’s business was now up 20% over its earlier peak performance. This owner was lucky to have averted a situation that could have had seriously deleterious effects on his family’s financial security.

LESSON: Don’t roll the dice when you have a good offer in hand.

Case Study: 2

Poor Advice from Professional Advisors

Sellers need professional advice. However the advice should be considered in view of the advisors’ area of expertise. Attorneys should focus on legal issues and the legal meaning of the words contained in the agreement; the attorney’s job is to protect the seller’s legal interests. Financial advisors and CPAs should focus on the financial and tax implications of the deal. Their job is to do whatever they legally can to lower the tax impact for the seller.

M&A advice is the responsibility of the intermediary hired to represent and counsel the seller on the merits of the transaction and to ensure that the price and terms are at market value or better and that the deal meets the stated objectives of the shareholders. It is risky to accept advice, however well meaning, from advisors trying to operate outside their primary area of expertise.

A seller we dealt with decided, based on advice from three well-meaning but uninformed advisors, that his business was much more valuable than the market indicated. These advisors were an attorney, a CPA and a relative with an MBA.

All three wished only to help the seller; however, among them, they had participated in only a single business sale: that of a neighborhood florist shop to the owner’s son-in-law. None had ever participated in the sale of a service firm. At a scheduled meeting with the potential buyer, who had flown in specifically for the meeting, this trio descended on him like a ton of bricks. The original agenda, scheduled to explain the terms of the buyers’ offer, was ignored while the advisors told the buyer why the seller’s business was worth far more than he had offered.

The seller’s advisors used many colorful charts and graphs to justify their views. However, the presentation had nothing to do with the circumstances of the seller’s business. The buyer showed great restraint. Although offended by the new agenda, the buyer was an M&A veteran who stayed clearly focused on the big picture and listened patiently. Eventually the seller, upon understanding how close he had come to losing a great deal, took control of the situation, and the deal was completed.

LESSON:It is your responsibility to control your professional advisors and be sure that they understand that your objective is to complete the deal. Remember, “Experts advise, but owners decide.”

Case Study: 3

When is a Good time to Sell your Staffing agency?

There are many factors to consider in determining a good time to sell your business . There are economic , social and practical issues that enter into the equation . After many years as an operator and in the staffing industry, we believe everyone needs an Exit Strategy ; the difference is the timing of the execution.

The Best Exit Strategies are Planned

At times , unexpected circumstances and Tragedies make planning very difficult ; however , if every owner of an established business thought about “what if ” they might be better prepared to face an unplanned sale, if necessary.

Ideally, When an owner begins planning anywhere from 3-5 years before they anticipate selling, they will have adequate time to get their business in optimum condition for a sale. Remember to add some transition time between the sale of the business and your personal exit time. Most transactions today have earn out payments for 1-3 year terms and often the earn out can provide a real boost to the initial valuation, especially if the market is strong . When an active owner departs before the earn out period is complete , it is helpful if there is a reliable second in command.

Absentee owners may need to ensure their management team will stay through the earn out period and some owners offer completion bonuses for key managers to remain and help achieve the full earn out potential.

All of us would like to sell at the top of the market ,extracting the highest price possible with the best terms. However , the old saw that says something like “the bulls and the bears can do great in the market , it is the pigs that always fail”, has some merit once you realize that the only way to know if you sold at the top of any market is after the fact . If one was able to time business sales for the peak of the market , they are very lucky or should be making their living as a fortune teller.

While there may not be a consensus of when is the best time to sell your staffing business, it is always good to sell into a growing market on the upswing . Especially since a strong market may lift all the ships in the ocean and help you maximize your earn out payments.

Many owners of a certain age are planning on retiring with the proceeds of the sale of their business . Others with perhaps firms have a specific financial goal that may not have anything to do with retirement ; it could be to finance a different business of greater interest to the owner, or it could provide a portion of their retirement needs, to supplement with other investments or assets owned.

Owners thinking about selling should focus on the areas they can change , For instance while many (but not all) buyers prefer major markets (i.i. Top 25 to 40 ) , this is a factor beyond your control , your business is where it is and with relatively small changes it will likely stay where it is.

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Sam Sacco

R.A. Cohen Consulting
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R.A. Cohen Consulting
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R.A. Cohen Consulting
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