If you had a business that was doing ok, then had a surge in business, how would that impact selling your business?
It is hardly news to say that the Covid-19 pandemic had a profound impact on most business, and life in general. I was talking about this with some other investment bankers, one of whom shared this story.
One client had some online sales technology that they were struggling to expand into the US market in 2018 – 2019. The owners hired the investment banker to sell the business.
Then Covid-19 with the ensuing lockdowns hit and online sales exploded. This business had to ramp up wildly fast and it was soon rolling in orders and cash for the first time ever – to the tune of $1million/month, many times their previous volume.
The owners of the business (who were not the day-today managers) saw this surge in cash flow as validation of their investment. The investment banker saw this as optimal timing to sell and got several offers for the business in early 2021.
Sounds like a win-win right?
Nope. The owners/sellers suddenly found excuses to turn down the offers. They were fooled by the online sales bonanza thinking that their business had finally found its footing and would keep growing.
Nope. As late 2021 turned to 2022, the sales collapsed to less than $100k/month, projected to $1M/year – ouch. Clearly the owners had no idea how to fix the business. Their 2020 results were really dumb luck – rather like finding a four-leaf clover.
In mid-year 2022, the investment banker did find another buyer offering a similar price to the 2021 offers, but with a 75% earn-out (where the seller will be paid a portion of the sale price many months later based on revenues that the buyer generates). The sellers grudgingly accepted it.
The moral of story is that timing is often everything and that greed kills. When revenues and profits of a business are at a high point, that is often a great time to sell – but owner/sellers may not see this. When sales and profits decline, sellers have to accept the reality of a lower price for the business and/or heavy earn-outs. While some might say they should fix the underlying issues, in this case the owners were the problem. Selling really was their best option.