Selling your California business to a Private Equity Group
In mid-March 2020, it was with great pleasure I was able to assist the owner of a California manufacturing business successfully sell his business. It was physically located in Silicon Valley and three days before the sale closed, the 6 Bay Area counties were closed due to COVID-19 and so we thought the deal might not be completed.
This business is exceptionally successful in its manufacturing niche and was enjoying an annual EBITDA of over $1 million per year. As a result, there had been huge buyer interest not only from within the USA but also from potential buyers from Europe, the Middle East, and Asia including China and India.
The Buyer was a Private Equity Group
The buyer of this business was a very experienced Private Equity Group or PEG. Because of their experience, internal and external team of professionals supporting them, attention to detail and focus on speed, it was hard work, but we were able to get things done.
Internal advisors and external advisors
Their internal team consisted of two members that handled most of the face to face work, but they had CPAs, attorneys, and a committee to drive the details that were important to them.
Their external team included two divisions at Price Waterhouse Coopers (PWC.) One team was from their Accounting Division and the second team was from their Tax Division. They also used a downtown New York Law firm plus they had their own business intermediary.
Time kills deals
One of the advantages of this buyer was that they were able to work through all the aspects of buying the business very quickly.
Because I’d assisted the seller putting a comprehensive marketing package together and used a cloud-based tool to hold and share critical documents such as lease, tax returns, disclosure statements, list of fixtures, furniture and equipment that were part of the sale and more, we were ready to go from once both parties had quickly negotiated and exchanged a Letter Of Intent.
It took approximately 5 weeks to close the sale of the business once the Letter Of Intent (LOI) was signed, and the seller received money in his bank account.
To get the sale of the business closed so quickly required the seller’s attorney (who was terrific), the external book-keeper for the seller, and me working weird hours and being in reactive mode from all the questions from the teams assisting the buyer.
Negotiating the sale of your business to a Private Equity Group
There were many moving pieces for the sale of this business. Here are a number of interesting pieces that mattered in the successful sale of this business.
- There were approximately 82 buyer inquiries while this business was for sale.
- Of the 82 buyer inquiries, approximately 43% were individual buyers and 57% were from US-based PEGs or similar such as a Family Office or Search Fund.
- Some of the buyers became too hard to work with as they wanted to negotiate exceptionally minor points of the Non-Disclosure Agreement (NDA). This is typically a red flag. If they are arguing about minor details that protect the seller of a California business, it means they do not really understand the complexity of doing business in California.
- One PEG wanted to change one sentence of the NDA. When I asked the reason for the change, they were unable to explain why. When I suggested their wording was like the current wording and the next paragraph of the NDA gave them what they were asking, it was clear they would have been difficult to work with. I presented the situation to the seller so he could decide, and his decision was to not worry about this PEG and to move on. This PEG eliminated themselves from being able to buy this business.
- Another buyer presented themselves as being led by an Investment Banker. After many questions, they offered a Letter of Intent (LOI) to buy the business. Their LOI required the seller to offer a three-month exclusivity period. This meant the seller could not review or accept offers from other buyers for this period of time. The LOI also said they were offering a large cash down payment to buy the business. The seller made a counteroffer and as part of this counteroffer, made a request for a copy of the Proof of Funds bank statement to show the Investment Banker had cash available. The reply from the Investment Banker was that they needed to get their cash in place. As a result, the seller held off accepting their LOI until the buyer could show the cash was available. This turned out to be unfortunate for this Investment Banker as the other buyer came along, provided a detailed LOI including Proof of Funds and the seller chose to accept this offer. After about 5 weeks of due diligence, the sale closed, and the Investment Banker missed out.
- Without exception, each individual buyer was needing third party finance such as an SBA loan to buy the business. Without exception, no buyer had been prequalified by an SBA lender with a letter in writing to confirm they would qualify for an SBA loan. In my opinion, this is an opportunity for qualified and motivated buyers to do better as this simply increases their chances of successfully buying a business.
- Each business I take to market when I am assisting the seller, I typically have an SBA lender review the business to get their interest in providing an SBA loan. I do this because it increases the chances of the business selling and removing one of the obstacles for a buyer and seller to negotiate a deal. By taking these steps it allows buyers to move ahead of other buyers and encourages the seller to take the time to negotiate with the buyer and put a deal in place.
Not all Private Equity Buyers are equal.
If you own a business located in California and are willing to sell the business to a PEG, the following may help make your transaction be successful.
- Ask very early into the process why the PEG is willing to buy a business in California. Many out of state PEGs don’t like what they see in California as they see the state highly regulated and a difficult US state to do business. It is what it is but be careful wasting your time if this is important to the PEG.
- Ask the PEG to provide references. Many PEGS including Family Offices and Search funds are getting started. Asking for references and deals they have closed should be expected. Be aware if they have no website as it means they are starting out and may lack knowledge and experience of the acquisition process and just as importantly, may want to drag out the process as they are still learning.
- Do they ask the right questions? This may be intuitive but it can be easy to see they lack transaction experience and will be hard to work with if they continually ask a series of questions and then a few days later come back and ask the same questions but in a different form.
- What is the PEG’s track record with similarly sized companies? This can be very important to understand from a PEG wanting to buy a business as they typically pursue a business model or thesis with specific targets including the industries they wish to focus on. As they make acquisitions, they move and the PEG grows, they gain and build synergies. As the owner of a business and thinking of selling to a PEG, make sure you understand the PEG and their goals and if it’s a fit for what you want to do.
- What does the PEG want as part of their acquisition? Often a PEG wants to preserve the current management structure as this is what is making the current company successful. But as the owner of the business and business seller, staying on for a long period of time, say 12 months to 5 years may not fit your goals. This is an example of a question to ask early. I was recently hired by a seller who spent just on 12 months negotiating with a PEG. The PEG always wanted the seller to continue running the business for at least 5 years, but the seller wanted to leave after one year or a maximum of two years. For some reason, this was never discussed until 12 months of negotiations, and the seller providing a lot of detail about their business.
- If you are selling the business and are willing to stay for a period of one to three years, make sure it’s clear what the PEG is bringing apart from capital. For example, does it include help with strategic planning, management team recruitment, business development or negotiations for add-on acquisitions, and/or with other areas of business-building? If so, what financial benefit flows to you from helping manage all these moving pieces? Just as importantly, make sure what they talk about can be supported by the business owners from other companies they have bought.
- Finally, and most important of all, you and the PEG should genuinely like and respect each other as you may spend a lot of time together or more importantly, have to make difficult and stressful business decisions. Before the seller closes the sale of the business to a PEG, they want to say to themselves, this is going to be a ball and I’m looking forward to doing this. Hopefully, when the seller makes a final exit from running the business, this has been the case.
Are you ready to value and sell your business?
Is this now your time to value and sell your business? If it is, make sure you do it properly.
Valuing a business to sell requires an accurate analysis of the financial statements to defend the price to put the business onto the market. This is not only critical for the seller but also the buyer and just as importantly, any third-party finance company the buyer chooses to obtain to help finance the purchase of the business.
Click this link for more information about accurately valuing a business.
The steps to successfully sell a business are many. This link provides a one-page summary of the twenty-four steps to sell a business.
If you would like more detail, please click this link for a more comprehensive explanation about the steps to sell a business.
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