INTRODUCTION
A Louisville business owner in her early 60’s in the software/services industry was looking to sell and begin her retirement. She had created and operated a successful company that employed 50-100 people and sustained rapid customer and revenue growth. She felt the company was in great shape and ready to be sold. A private equity firm expressed interest in the business and she decided to sign a LOI.
THE PROBLEM
The due diligence process continued for months and she felt like they were being VERY picky, demanding documentation and details that seemed irrelevant to her. Less than two weeks before the deal closed, the firm rescinded their offer. The owner was blindsided and dejected by the whole process. She wondered what was not to like about her “baby” – the business she bootstrapped to the level of success she achieved? How could this have happened? Here’s the answer: she was not ready to exit her business. She failed to prepare her business for sale and neglected items including documenting processes, sales process structure, corporate governance best practices and other salient points the private equity firm was looking for.
She made a huge mistake, and now that mistake is compounded. She failed to have her firm “Show Ready”, as we would say in our Biz2BeachTM terminology. In other words, if you were to put on a show where your business was the star, you wouldn’t spend parts of the show explaining away why the set didn’t look right or why you were singing off key (if this show is a musical).
To further compound her agony, she realized she may have set herself back in an important way she had not yet considered. Since the first private equity firm declined to purchase her company, a subsequent sophisticated buyer will certainly ask if she has entered into any LOI in the prior five years. When she discloses that she HAS, and it failed to result in a sale, her company may be considered “damaged goods” in any future buyer’s eyes! Why? Because that’s the way humans process things. Imagine if a homeowner were to list a $500k house for $750k and not receive any offers for a year. Even if they were to lower the price closer to $500k, potential buyers have a tendency to wonder “What is wrong with a house that has been on the market for a year?” The same effect translates to any asset for sale, especially a closely-held business. Making a mistake like this comes at a cost, and in this case likely multiple millions of dollars.
CONCLUSION
The moral of the story is that owners can’t afford to wait until they feel like they are ready to retire to begin the preparation for a sale. It’s tricky, complex and requires concentrated effort and dedication. We encourage you to consider starting your journey at www.Biz2Beach.com. Here you can begin to understand the process involved in making your business “Show Ready” well ahead of time.
