HOW NOT TO SELL YOUR BUSINESS
The real problem was what Henry had told his father, Ben, even before the negotiations began. He told him that once they sold the business they would start a new one, selling guided fishing tours to their favorite locales in Colorado. His father had beamed.
It had been at a weekend barbeque and his dad always wanted to know what was still happening in the business after his own retirement from it five years before. Now that his son and successor CEO Henry was thinking of selling the business, they were both excited about the possible semi retirement business they hoped to start…the fishing tour company.
Meanwhile, they still had to sell the current business, an electrical wholesale distribution business. Then they could see if they could make money while fishing in Colorado. Dreams.
They were on the patio near the grill, both leaning forward on their chairs, hands gesticulating interrupting each other in their rapid talk. Barbara, Henry’s mother who had pestered her husband into retiring in the first place, began to bang the dishes around noisily in the patio sink as she heard her son and her husband excitedly talk about the chance to sell the company at a great price and make money fishing. She had wanted the retirement precisely to avoid the excitement and stress on Ben and remained convinced that he would keel over dead if the business remained a topic of conversation.
“That’s all right,” she would interrupt, “Go ahead and die on me. Go ahead. I don’t mind…” and would grab the plates of chicken and stomp into the house.
My wife and I would glance at each other, suppressing smiles, since she had been warning Ben of his likely death for over a decade and he seemed as healthy as an ox. He ignored her and urged his son to tell him more about the potential purchase. They were talking spread sheets and product mix and web site publicity when I interrupted.
“Before you guys get too much into planning your announcements to the public, maybe you had better finish the deal. We don’t know it’s going to happen.”
They both stared a moment, then Henry grinned. “Sure it is. We want it, they want it, and you are going to write a great contract that makes everyone happy. You saw how interested they are. They signed the nondisclosure agreement right away. They want the deal.”
“Maybe. Maybe they just are window shopping. Maybe they don’t represent all the people in the company. Maybe they have another company they are looking at…”
Henry now leaned towards me. “I deal all the time. As much as you. I can tell when I have a fish on the line. They are biting.”
”Sharks bite as well. You don’t want to be the fish they eat…they talk a good game but I haven’t seen any real terms as to their offer or financials we can really trust… and it’s two months since they called you. Why not move this along if they are really interested?“
“Why waste our time and their time if they are not really interested?”
It was my turn to lean forward. “Because they are interested…but not necessarily in you. They may want to enter your market and what better way than to check out a competitor by figuring they will learn the market while doing due diligence. They can always look you over, look over your operations and methods, then say no deal and open up next door…”
That stopped them talking for a good five seconds. Then Henry shook his head. “Pretty clumsy way to go about it, seems to me. They can figure the market out without paying accountants and lawyers to check into buying a business so they can just walk away…”
“It’s not that expensive. They need local counsel and accountants anyway, the negotiation will cost them ten or fifteen thousand and much less if they use in house counsel. They may figure that they buy you if they get a great price and figure the due diligence is a cheap way to check out the market and the competition….I’ve seen it before.”
I stopped since they both looked so crest fallen. I saw to my regret that they really had moved their business mindset to their new fishing venture. That was dangerous. If the buyers saw that, they’d have a tremendous advantage in the negotiations…but this was not the time to talk about it. This was a Sunday afternoon, the family was happy, and I was ruining it all. I quickly said, “But this is all guess work. They may really want you and may pay what you want. All I am saying is slow down your planning a bit….we don’t know yet.”
Too late. I had changed the whole atmosphere and the barbeque was subdued for the entire evening. My wife gave me hell. “You don’t have to be the smart lawyer all the time, you know.” She was right. I should have saved my advice for the following week when we were all sitting in our conference room with the negotiating team of the possible buyers.
And by then my advice was needed. The possible buyers were putting on a full show for Henry and I, bringing two lawyers, a CPA, their CFO, their Sales Manager, and their CEO was available by phone as needed. We still had not received firm terms as to the purchase…only hints that much of their purchase payment would have to be a promissory note secured with nothing…nor had we received financials we could rely upon despite their desire to pay most of the price via an unsecured note. They were big, true. But a big company can still be broker than a small company and I was uncomfortable. They wanted to buy us but would not give us the information to verify their ability to pay.
Henry was still subdued after my outburst at the barbeque and his face was carefully blank as their CFO explained why their banking covenants did not allow them to agree to a down payment greater than five percent but that thirty years of profitable operations should give us all the security we needed. It was my job to be the unpleasant voice in the room, so I spoke up.
“A good track record is important to us. But absent full financials that we can analyze, the track record cannot satisfy our needs. We need to know the assets on hand now…”
Their CFO smiled with a hint of superiority. “You are aware that our sales are fifteen times yours, right?”
“We know that. But we are not asking you to accept a note from us so we can buy you. You are, actually, borrowing the purchase price from us. You want credit from us, effectively. We need to know your financials to know if that makes sense to us.”
“With our sales, what’s your worry?”
“Sales are sales. Anyone can sell a lot if they lower their price a lot. Assets and cash in hand are another matter. What’s the problem with giving us that information?”
“We like to keep confidential information confidential. I can assure you of the net asset figures are within the range of those typical in our industry…”
“And I am sure that if that is the case, there is little need to keep it confidential. We can agree to retain it with confidentiality provisions. You know there can be no deal involving a large promissory note without access to your financials, I am sure…”
A moment of silence. He glanced at his attorneys. They had been remarkably quiet during these discussions. He leaned back, tapping his fingers absently on the pads of paper in front of him. “We certainly are willing to provide all relevant information but that seems a task that can await the final stage of these negotiations. We still need to finish up our own due diligence and are concerned about depth of middle management. We wonder as to the lack of employment contracts, for instance…”
“Exchange of information is just that. We want an exchange, not merely one way…”
He was well versed in negotiations and he saw we were getting our backs up. He blinked. “It will take us some days or even a week to get our full financials redacted but you will get them. Meanwhile, as long as we are here, can we ask about middle management? And if that bothers you, we need to know more about the decline in the accessory portion of your business? It looks to be more than ten percent in the last two quarters…”
Henry broke in. “I have nothing to hide about how we are doing. We are doing great. But my lawyer is right. We need to know what you are planning to put on the table. And we need to know that this deal can happen. I am getting a little tired of one way disclosure.”
The CFO was all smiles. “We understand that.” He spread his hands. “Let’s not all get paranoid here. All of us are cautious business people. We don’t want to give away secrets. We signed your non disclosure. You are safe from us stealing your secrets…”
“But not our methods, procedures, market information,” I broke in. “We would never know what you are really using or what stemmed from your own plans. You know that. We need mutual disclosure here. We just need some good faith here…”
And so it went for the next hour, them prodding us for information, we pushing back, them giving away a little here and there, we resisting more and more, but Henry not wanting to give up the deal before he was convinced it was not going to happen. Their CFO, named Blunt, was not stupid, saw the change in the feeling in the room, and towards noon suddenly looked at his sales manager and said, “Look, Bill, let’s cut this short. They don’t think we are serious. Call Hank and tell them I want five hundred thousand dollars set aside and put in escrow and I want proof of that delivered here by mid afternoon.” He looked back at us and saw by my blank expression that it wasn’t working.
I smiled a bit grimly. “That’s a good start. Now put it in as a nonrefundable deposit and we will feel a whole lot better…”
He laughed. “I bet you would. But we’re not kids. You were worried if we had the cash for the down payment. I am showing you we do.”
To my surprise, Hank took the pointless gesture seriously. “We appreciate that. We really do.” He did not look at me. Instead, he opened a folder in front of him. “ Now, you were asking about trends…” and began providing yet more information.
At the noon break I pulled Henry aside.
“You do know that escrow account means nothing? They are simply shifting their money from one account they control to another….it’s not escrow unless we have some control on it…it is window dressing…Next week they can move that same money to cover another obligation or to show some other fellows that they have plenty of cash…”
“I think it means good faith. You lawyers are always suspicious…”
“Henry, you buy and sell but you don’t buy and sell businesses. I have done a lot of these and know when things don’t feel right. That “demonstration” of good faith was almost an insult. It proves nothing and if we act as if it means something, we show them we are neophytes to the game…”
He frowned and was going to argue with me, then closed his eyes for a moment and looked down. “Yeah, yeah, I know it…”
I kept going. “They are putting next to nothing down. They are redacting their own financials. They are finding out more information about you…a potential competitor…than they ever could have discovered in any other way. They are interviewing your staff which means your staff is getting worried about their future and they are making contacts with people that in a year or so they can try to hire away…We need a binding letter of intent before you give them any more access to your information and we need to have them put up a real deposit. You can’t keep giving them access to your people and information.” I realized I was really upset. The whole deal was making me feel as if we were being set up.
“We aren’t that much of a threat to them…”
“Sure you are. You’ve been here for decades, have a good reputation, and for all we know they are hocked to the gills and can’t afford to throw the money into this market that it needs to crush you in any other way. They’ve bought four other businesses in the last ten years…who knows how much they have spent? How much they owe? They are big. That means nothing. GM was big and went bankrupt.”
I stopped since the buyers were coming down the hall on the way to lunch. We did some polite chit chat, declined their offer to go to lunch together pleading having to check our e mails, and I pulled Henry into my office so we could talk more.
But he didn’t talk. He just sat there while I expostulated to him about how weak we were looking, the dangers we were running, the need to insist they put more on the table right now. Finally I ran down and we just sat looking at each other. I had calmed down enough so I could see something was really wrong and he didn’t want to tell me. Another moment of uncomfortable silence while he stared at the paintings on my walls. Then he blurted it out.
“Dad bought the lodge.”
“Lodge? What lodge?”
He sighed with some exasperation. “I told him to hold off. Mom doesn’t know…”
“Where we were…where we are…going to start the fishing tour business. In Colorado. He borrowed from the pension plan. Mom just signed the papers not really reading them. He’s bound to complete the lodge purchase in another thirty days…”
“He didn’t show me the papers. He bought it without legal review?”
“He knew you’d say he was crazy. He said lawyers kill dreams.”
That stopped me for a minute. He had a point.
But that may be our job at times, especially when facing smart and aggressive buyers…and here the dream could become a nightmare. Henry and I just looked at each other for a moment. “How much is his deposit…the nonrefundable part?”
““We’re past that. He bought it. Not a deposit. No contingencies. We simply come up with the rest of the purchase price in a month.”
He smiled slightly. “No, I wouldn’t do this without you checking it out. But I promised him I’d go in halves when it was time to buy the place and he plans to pay the pension plan back once I do that. Has to if he wants to have enough to eat, really. And if I don’t back him here, they are pretty desperate…and Mom will kill him when she finds out what he did, anyway…” His voice trailed off.
I leaned back in the leather chair and it was my turn to stare at the paintings at the wall. Then I took out my calculator. “OK, give me the price of the Lodge.”
He hesitated before responding. “One point two…Includes a lot of land. River rights. It’s a good deal…”
I blinked at that. “One point two million. Due in a month. Borrowed from his own pension plan. And you still have a kid in college, right?”
“Two starting next year. And expensive ones.” He tried to smile.
My voice became hard. “OK, so let’s get this straight. Can you swing the Lodge deal without selling the business? Yes or no?
He wouldn’t look at me. “Sure, if we borrow some. Maybe plan on state college for my youngest. Cut back on some expenses.”
I leaned forward. “But if you don’t sell the business, how do you run the Lodge? You’d have to help him there, right?”
He said nothing, just nodded. “So…you have to sell the business, don’t you, Henry?”
He nodded, looking down.
I was oddly angry. This was not that unusual…people start to dream and implement their dreams too soon all the time. But I realized I never expected this of Henry…he was a smart, tough negotiator. This was not like him. “Henry, you know this is nuts…”
He looked up. “You don’t know all the facts. Dad’s dying…”
I sat up. “What?”
“He has three years, maybe four. For two of those years he will be pretty healthy. Then it goes downhill fast. And this has always been his dream. He doesn’t want anyone to know…this deal seemed a perfect answer.” He sat up, too, face grim. “And I was an idiot, wasn’t I? I was an emotional fool. Walked right into this and now they are not going to buy me for crap…”
“We don’t know that for sure…”
“Sure we do. You and I are negotiators for a living. We can tell when it doesn’t feel right. This doesn’t feel right, does it? I mean, I can only lie to myself so long…” He clasped his hands on my desk. “Business does not allow emotion. You are always telling me that. I let it in and now I’m up against the wall.”
It was my turn to make sure cold hard thinking was at the fore. When confronting a crisis in a case, I have a certain process I almost always use to make sure decisions I make are the type that are not influenced by my own emotion. The first step, if possible, is do nothing and let the waves of reaction subside. So we spent the afternoon with the continued sparring, agreeing to meet the following week to continue with our discussions, no one committing to anything, giving them some peanuts of information.
And I told Henry to go home, enjoy dinner, and I sat staring at the wall in my office.
We had to come up with the rest of the money for the lodge in thirty days.
To do that, Dad would be broke and would borrow on his pension plan. Henry would have to put in enough money to make that whole in perhaps sixty days.
Henry was right. These guys weren’t about to buy the business for more than a token. Once we insisted upon real mutuality in disclosure, they’d fade away.
But our business was sound and making money. The problem wasn’t the business. The problem was that Henry and his Dad had already mentally sold it, Dad because his dream was to own such a lodge, Henry because he loved his Dad and his love for his family had blinded him to business realities. That made Henry a good son and a bad negotiator. But hurting his own son’s future was not the way for Henry to make his father happy. But…he was the sole owner of his company and had a good cash flow…
The next morning I called the company CPA and we had a long meeting with cash flow analysis, trend analysis and asset evaluation. Henry was making good money and was going to be making more. He had a great line of credit at the bank, guaranteed of course, and a banker who knew him and liked him. I trusted his banker a lot more than I trusted the buyers.
Henry and I were sitting across the desk of the banker that afternoon. The banker was young for his position, smart and trained in how to turn down requests. His face became a bit grim as the meeting went on. He listened while we bluntly explained the situation. In front of him on the desk were the brochures and economics of the lodge and he fingered them and looked even more unhappy. I was planning to make him unhappier, still.
“Look, Jim, it’s not complicated. If Henry sells the business to make the deal, and now he has to, the new owners are not going to use your bank. You lose. Henry loses. His family loses except for his Dad who gets to play with the lodge for a few years. If we don’t get your help, that’s probably going to happen. We have no choice.”
Jim looked up and said nothing, waiting for me to go on. I did. “On the other hand, if you loan Jim and the Company sufficient money to buy the Lodge we will commit to sell the bloody thing in two or three years…unless we find another buyer of the business who is real this time…we pay you good interest, Dad is happy, we will lose some money on the lodge and your interest, you make money on the interest, we stay in business, you keep a good customer…
“The bank will never loan money on this lodge…it’s three hundred miles away, its economics are mediocre…”
“Let me be clear. You are loaning money to the business and they pledge their assets. Henry guaranties. The Lodge will be owned by the business as another asset. With a pledge to sell it in another two years…”
Jim was a banker and he was smart. The business balance sheet with the Lodge would look fine for bank examiners…for now. “Who runs the Lodge?”
“We hire some expert to work with his Dad. Henry goes up time to time. And we put our key employees and customers there from time to time…”
“IRS won’t allow that. Too much expenditure for too little benefit to the company..”
“Probably right…so in your analysis figure we don’t get to deduct much of the cost…it’s still an asset…”
“Not the right asset for this business…”
“That’s up to the business, right?”
“Not if they want to borrow the money from us,” he replied sharply. “What can I show the Board if they ask why we are loaning money on a Lodge three hundred miles away…?”
“You show them you are loaning money to a prosperous company with a good cash flow that is trying out a Lodge, can afford it, and will sell same in three years. What’s the worst loss this could develop even if the property drops in value…?”
“We do. In front of you are documents showing trends in real estate in that area for the past twenty years. Even in the worst three years at most it drops ten percent. If it begins to lose a lot of money, we close down the business and sell it. We already have Henry’s Dad there running it for free…”
I went on for another ten minutes, pushing hard, making a little progress but not much, when Henry broke in. “Jim, you’d do it for your Dad, wouldn’t you? Wouldn’t you?”
A very long silence while Jim studied the papers in front of him. “We would require audited financials on the Lodge…we want you to at least break even for each year…”
I quickly pulled out a financial the CPA had given me. “That’s only thirty five lodgers a year. They have averaged that for the past decade…if the company uses it only half the time..” I waited, looking at his face.
He looked at Henry. “OK. I’ll try. No guarantees.” Henry leaned across the desk and grabbed his hand in a firm handshake.
The Bank was not happy and required three more meetings and made an offer that could have arisen from the Mafia…but was still better than the alternative. As they knew. The interest the Bank offered was horrible but our CPA said we could just do it if we were a bit lucky and I called the buyers the next day knowing that this would be one phone call I would enjoy.
The CFO was silent when I told him we had changed our mind about selling and thanked them for their interest. “Perhaps in another few years we will be discussing the matter again with you,” I said to the silent phone.
“But we are entering the market next year,” he said, voice sounding oddly flat.
“And good luck to you. We appreciated your interest.” He laughed shortly and said he had enjoyed dealing with us. Then, “Maybe you guys are better at this game than we thought…”
That annoyed me but there was no point in burning bridged so I muttered something meaningless and hung up.
And their offer in writing came the next day in an amount roughly ten percent higher than Henry and I had already agreed was a good price. I spent some hours looking over their letter of intent, noting the thirty percent down now offered, the good security, the reasonable employment agreement Henry would sign for three months, and looked up at Henry.
“It looks good. I can’t believe it, but it looks good. If there’s a loophole, I can’t find it. You can sell.”
Henry’s face was a study in mixed emotions for about a minute, then settled into ironic amusement. “They think we were playing hardball with them. They think this is part of the game.”
“And they really want you, now. Not just a fishing expedition…no pun intended.”
“Maybe it was to begin with…until they saw how good we looked and that we weren’t going to be bought out cheap. Maybe they realized just what we can do…”
I leaned back. “Well, it doesn’t matter much now, does it? We sign off on this and…”
“I’m not signing.”
My turn to look nonplussed. He went on. “I like things the way they are now. Dad’s happy. I get to have a lodge for three years. Get to have my son come into the business…”
“I thought you wanted to retire with your Dad…you looked excited about that…”
“Maybe I was. Until I found myself having to do that whether I liked it or not.” He laughed. “I kind of like what I do. I kind of like making good money and having my son maybe come into the business. And the way it is now, Dad gets what he wants and so do I…and I promised the banker we’d stick around. No…don’t want to sell, really.
“They are offering top dollar now…and are going to come in and be tough competitors…”
He sat forward. “Let them. We’ll see who has the staying power…” I knew that look of his. He was determined.
“Well,” I said, “ Looks like we did a brilliant job getting a great price…for all the wrong reasons and with pure chance being the cause of our brilliance…”
“Don’t let them know. Let them think we are really smart…”
“As long as we don’t think that…”
He laughed and went back to work. He never did sell. His sons run the business now. He lost about twenty percent on the value of the lodge…but his Dad died happy.
And whenever an unsolicited offer to buy his business would come in, he’d wink at me and say, “They have no idea how smart we are in jacking up the price….”
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