“Four million dollars is a lot of money, but I’m not sure if that’s a reasonable offer. What do I do now?” Jolene (not her real name) had come a long way from a very humble beginning. Five years ago, she was summarily dismissed from the company where she had worked for 16 years. Jolene didn’t see the termination coming so imagine her surprise upon being walked out the door by security immediately after being told her position was eliminated. “It took about six months to recover from that blindside hit, but I had a family to feed so I couldn’t grovel too long,” she told me during our first call. “I got started on this new idea, and it just took off. Now, I’m glad it happened.”
Jolene had called for advice on how to handle an unsolicited offer she had received a few days earlier. “I didn’t think selling the company would be on my radar screen for another four or five years, but when they said $4 million, it kinda got my attention.” She went on to say, “We’re on pace to grow another 25% this year, and I have a couple of new things for 2017 that are very exciting. If I sell now, do I get paid for the growth I’ve teed up or should I just wait, what do you think?”
I get a call like this several times a year. An entrepreneur is going about their business and one day an unsolicited, yet interesting offer comes in the door. I have a standard three-point response to the entrepreneur who experiences this. First, I congratulate the business owner for having the good sense to get advice on how to respond. More times than not, the company that is making the offer is experienced in the process, yet for the business owner, this might be their first (and only) time to sell a business. It’s smart to have a “been-there, done-that” advisor in your corner.
Second, I tell the business owner to recognize that if they think the offer is “too good to be true”, it probably is. Reality check: deals seldom close at the number put on the table to start the conversation. I see it happen all the time (and it also happened to me) … a big number is put on the table to get the business owner excited, a Letter of Intent is signed, and due diligence process starts, then the acquirer slowly, but surely, begins to peck away at the terms of the offer. The business owner feels too far down the road to turn back, so the deal gets done on unsatisfactory terms or it falls apart resulting in a lot of wasted time, energy and money. Here’s the real point, don’t get excited too quickly.
Finally, I encourage the business owner to meet with their accountant to determine what the after-tax proceeds would be if the deal closed as offered, then meet with their wealth planner to determine if that amount of after-tax proceeds can meet their financial needs. It’s important for the business owner to negotiate knowing the real impact of the decision on their life. Waiting too late to learn about after-tax reality can be a critical mistake.
I walked Jolene through these three principles, and we agreed to talk again once she’d done her homework. Two weeks later, she told me, “My CPA says the after-tax proceeds would be about $3 million. I then met with my wealth planner who said I could expect a safe after-tax return on that of about $8,000 per month.” Knowing that Jolene was age 52 and still had two children in college I anticipated what she said next, “I guess that’d be the right number five or six years from now, but right now, I need more than $8,000 per month to meet my obligations. I would really need a deal closer to $6 million to make it work for my family’s financial wellbeing, so I guess I’ll just keep on keeping on.”
But I could see the sparkle in her eye, Jolene had a taste of what life after the sale might feel like, so I said, “Let’s identify other companies that might want your business. Maybe we can get a buyer in the range of $6 million.” Meanwhile, I have given Jolene two ideas on things she can do now to move her company valuation closer to that targeted $6 million. First, I encouraged her to convert her accounting statements from cash to accrual, then I encouraged her to focus on how to more accurately forecast revenue and expenses. Buyers will pay higher multiples for companies that have reliable GAAP financial statements and the ability to accurately forecast revenue and expenses.
So, while we kick tires to see if there’s a $6+ million buyer out there, Jolene will strengthen her company valuation. I’m guessing sooner than later Jolene can sit back and thank the guy who fired her five years ago.
{Update: this story was originally posted in early 2017. Jolene has not sold her company because soon after this incident, she made a small acquisition that has since had a big impact on her business. Today her company valuation is well over $10 million, and she is committed to owning it another few years. Her desire is to exit about the age of 60. By the way, Jolene is now a grandmother and she’d much rather talk about that than her exit planning.}
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee.
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