Sold my business
- Thread starter Jerseytunahunter
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corn18
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Congrats!
A word of caution on earn outs. We were on the buy side of M&A (a lot of it) and we loved earn outs. 99% of the time we didn't have to pay them out. So be sure you are happy if you end up with zero on the earn out. You may think you have met the requirements, but their lawyers will have much bigger pockets than you.
We usually had 3 year retention requirements for key personnel as well. But most of those ended after 1 year. Once we were sure the company could survive, we did not want a president/owner hanging around if they wanted to leave. So if they wanted to leave, we would negotiate an exit package. Usually after we abused them on the earn out. Then they were happy to leave.
Hopefully your buyer treats you well.
Yoheadden
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Sounds promising
You put yourself in a good position.
Now it’s time for the final stretch
You put yourself in a good position.
Now it’s time for the final stretch
ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Good info. I'd be curious to know how large the "Earn Out" is (in % of the total deal, not actual $ amount). Sounds risky, but having heard good reports from this group in the past is promising.
A friend of mine sold his business, not sure if it was structured as an "Earn Out", sounded more like a hold-back if certain conditions are not met. I plan to talk to him this w/e. But the buyer scared off ~ half his employees, and of course is having trouble filling those slots now, and my friend is working 60~90 hour weeks, doing the actual field work that an hourly worker would do, not on training or "hand off" type activity. If this is still going on, I'm going to suggest he talk to his lawyer, this doesn't sound right - hopefully his contract was specific enough. But this is a bigger corp that bought him out, and can spend more on lawyers than he can
-ERD50
Jerseytunahunter
Dryer sheet aficionado
Thx for the responses very helpful information. They offered 80% cash at close, 20% in the EO. The earn out is based on a 15% increase in EBITDA yoy, which I think I could do. It will have a sliding scale for over performance and under performance. We're negotiating the terms now. I plan to offer my leadership team a compensation package tied to these goals.
corn18
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80/20 is a nice split for you. One thing to watch out for is costs incurred after close on an annual basis coming from the buyer side. Make sure you account for that in the terms. That surprised a lot of sellers. They would be running 50% gross margin and 30% EBITDA before we bought them. Then the corporate "taxes" started flowing down. IT, HR, headquarters, etc... costs divided up based on a three factor formula. Next thing you know, the company is down to 14% EBITDA and no way they can make their growth targets for earn out. You can account for that in your purchase agreement. But there are more insidious drags on EBITDA, too. The reporting requirements can go through the roof. And if you are accounting on Quickbooks or Excel and they are on an ERP system like SAP, then you have to account for that. That will eat a LOT of personnel that should be doing growth things, but are instead working 70 hours a week making reports to feed the SAP monster. The first year after acquisition for the leadership team is usually spent entirely on transition tasks. Leaving no time for growth which means no earn out.
Hate to make it sound awful, but I was on the buy side of over 20 mergers/acquisitions ranging from $5M to $2B. Some of them went swimmingly, others really disappointed the seller and their leadership team. The most disappointed were the companies like yours that the current owner built from scratch and loved.
Jerseytunahunter
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Corn18 this is gold please keep going I'm taking notes.
I agree. Hell I'm a total bystander and I'm excited for you!
corn18
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Are either of you a publicly traded company?
Jerseytunahunter
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No
corn18
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All cash deal? For the initial 80%. Do you have any debt in the business?
Jerseytunahunter
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Yes all cash. We have a small amount of loans and leases which will be paid off at closing. We're trying to get to 90/10.
corn18
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OK, saw in your first post that the buyer is private equity. That should make this a professional transaction. I will convey my thoughts from the buy side as I have never been on the sell side. For reference, I worked for a large publicly traded company that manufacturers stuff. We bought companies that had technology, customers, product lines or regions we wanted. So my expertise is in manufacturing. Take everything I say with a grain of salt. And this will be a diatribe in no particular order.
Since you have a broker and know what EBITDA is, you are leaps and bounds ahead of some sellers. I assume they have sent an Initial Offer of Intent (IOI) with a dollar range for the offer? And now you are going into due diligence?
It's good you have a broker. Your broker's sole purpose in life (in their mind) is to close the deal. They might not always agree with that out loud, but they are hunter/killers and closing the deal is all that matters to them. Make sure they are doing what you want because you are paying them. PE does this stuff for a living, so they won't accept any shenanigans. Don't be afraid to have conversations with someone you trust within the buyer's organization. Our best deals (for both sides) happened when there was a personal relationship between the seller and someone in our company. Talk to your friends that have dealt with this company and find out who you could confide in on their side. The lawyers and brokers don't always like this approach, but it makes the deal roll easier. If it were up to the lawyers, you would never close a deal.
Once we sent an IOI and the seller accepted, we went into due diligence. This can be painful for the seller. That's what I did for a living, due diligence. My job was to go in and look at the business and see if what you put in the deck was what we were getting. This never resulted in an increase in offer price. As you have noted, you have a multiple on the table, but I can haircut EBITDA in a million different ways. So, I wouldn't focus on the multiple. Focus on the number. It's kindof like the car salesman that wants to talk car payments vs. sales price.
I have so much I can type, but for this post, let me keep it simple. For the sale, you will have to defend your numbers to maximize the sale price. Really not that complex, but I don't want you to be surprised if they come back with a serious haircut on your EBITDA. Working through this is fairly straight forward and as the owner, you can manage this with your experience, guts and instinct.
If you want more details on due diligence, let me know. I can write a book on the sell side process.
I think where I can really help is post acquisition and the earn out. If you get 90/10, I wouldn't sweat it too much. 10% will be more of a pride thing than a battle. But, the solution is both difficult and easy.
Cost, cost, cost. That's it. Here's why: after close, your costs are going to go up because of the acquisition (especially in the first year). If your costs go up, your EBITDA goes down. Your earn out is at risk. It's just that simple. Happened every time we bought someone. Even without an earn out. Lots of harrumphing at HQ when we forecast 25% EBITDA and we only got 15%, even thought the company's top line grew 20%. They got eaten by cost.
Know what your current costs are in agonizing detail. If you do not currently have a genius cost accounting guru on your payroll, get one. We called them controllers. They can help with the sale, but they will earn their keep in the transition.
After close, track costs relentlessly so you can account for transition costs. These transition costs should be entered in a separate line of accounting in as much detail as you can manage. That way, when it comes time to talk earn out, you can compare your YoY EBITDA without the acquisition costs. Not fair to include them and erode your post acquisition EBITDA, but we did it all the time. Mostly because the acquired business did not collect this data and without it, you can't defend your position.
Some things that can erode EBITDA post acquisition:
- 401k: If you offer a 401k with 50% match up to 3% and they offer 100% up to 5%, you are going to eat those costs.
- PTO: If you offer a scaled PTO @ 5, 10, 15 years and their scale is different, you will have to adjust your accrual for that cost. If their's is more expensive, you will eat those costs. Also, how are you handling accrued PTO in the transition?
- Medical/Dental/Etc...: This can go both ways. Just know what the plan is. If you have to transition 70 people to their plan and it is more expensive, then you will eat those costs.
- IT: This can be a nightmare with no end. The biggest issue is enterprise management. Transitioning to an ERP system can cost millions. I doubt a PE firm will make you do that, but you will have onerous reporting requirements, extra travel for meetings and may need to hire more personnel to manage all of this transition stuff. Account for this in the transition cost line of accounting. Watch out for IT preferred vendors. Some big firms like to make you buy stuff from their negotiated contractors, and they are usually way more expensive than what you can buy stuff for on your own. Things like computers, office supplies, telephones, etc...
- Capital: since you are dealing at the EBITDA line, the cost of capital will be borne by them. But the rent, utilities, maintenance, etc... will be your cost. Not a problem until they want to move you to their big, shiny building in New York that costs 10x what you are paying now. Keep track of it.
- Travel: You may have to travel a lot more during the transition. Keep track of it. And watch out for the PE firm making you use their travel agent. Ours was way more expensive than doing it yourself, but they had to use it. This cost them more, but we didn't care.
That's all the SG&A stuff I can think of right now. I'm sure there are a hundred things I have missed, but the details aren't as important as the concept. Knowing your current costs and tracking your future costs will allow you and the PE firm to better understand your apples to apples YoY EBITDA growth.
Actionable for you now: identify your accounting guru and get them up to speed on what you expect. Figure out the process for implementing the cost accounting. You do not need to discuss this plan with the buyer or broker unless you want to. BTW, due diligence should reveal your true current costs, but make sure you agree with them. The baseline will be what you have to live with for the next three years.
I'll post more on growth after dinner.
ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I'm just an innocent bystander, but I'm fascinated with this inside view. I feel like I'm sitting in a Master's Class. Thanks for taking the time to share your insights.
Looking forward to the next update and responses, I imagine this has been of great help to OP, just getting a handle on the concepts.
-ERD50
street
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^ yes, interesting inside view.
38Chevy454
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Corn18, thanks for the details on your expertise. Really interesting to someone that is basically in the bleachers, vs the ones playing on the field.
Jerseytunahunter
Dryer sheet aficionado
Awesome information thank you for taking the time to post. My broker is a master negotiator and has done deals with this buyer in the past. This is both good and bad as they know they'll see each other again down the road. There is a fair amount of trust and integrity between them but my guy might not push back as hard. Latest details-the seller is willing to give me stock in his company and make me an owner. This is rare in my industry. My friend from Texas did this and has tripled the value in the last 3 years. He vowed to leave after a year but is still working and loves being part of a top company. Corn18 please message me your address would be happy to send a bottle of scotch.
Qs Laptop
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Fascinating stuff, thank you Corn18.
I'm going to start the process of selling my small manufacturing business so this information is extremely interesting to me.
I'm going to start the process of selling my small manufacturing business so this information is extremely interesting to me.
corn18
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Sounds like a good bunch to work with. I will say none of the deals I ever worked on were ever adversarial. Always professional. Business is business.
The only thing I was going to add was on the growth side post acquisition. You can grow EBITDA 2 ways: increase sales or reduce cost (or both). Increasing sales usually requires investment, so make sure you have the control you need if you need to invest. And we talked about costs. Reducing them is always a good thing as long as it doesn't impact growth. That will be hard to do post acquisition, I suspect. You know you're business better than anyone. Just make sure they give you the authority to spend your revenue as you see fit. We had an onerous IR&D approval process that usually slowed up a new acquisition. And we put so much pressure on them to produce cash that they had to make hard choices between investing and spinning off cash.
I think that's it unless you have any questions.
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Jerseytunahunter
Dryer sheet aficionado
Well, here we are it's Christmas Eve. We close 12:01AM November 1st. I couldn't even put into words how difficult the quality of earnings and due diligence were. We signed the LOI Sept 7, so to get all of the work done in seven weeks made it I think 2x harder. Anyway very little to do today, it's pretty much a wrap. My team is a little stressed but having myself and my director of operations stay on for 3 years is comforting. It's funny how my perspective has changed since I signed with the broker in May. At that time I wanted out but in going through the process I realized how much I like my job and my team. I'm happy to stay on to make sure my people and my customers are taken care of-plus the earn out is significant. Thank you everyone who contributes on this site I learn something each time I sign on.
corn18
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Congrats! Selling is the easy part. The transition will require all of your leadership skills to keep all the BS from impacting your team.
38Chevy454
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Congratulations Jerseytunahunter on getting through the process successfully. Now you can look forward to those 3 years passing and becoming fully retired at that point. Or if the work is still fun, can continue but without any contractual commitment.
