For young entrepreneurs who launched their companies in the past 5-10 years, grew them through intense energy and hard work, and then rode them out through a punishing pandemic, more than a few of them will be saying today “I don’t ever want to go through that again! I want to sell my company and begin living my life again!”
And if they didn’t need help before, they certainly need it now. We met someone recently who said essentially that. “Let’s sell this company before the year’s out, so I can really celebrate the holidays.” The only problem, well problems plural, that will likely dampen the holiday spirit, are these, among others:
- They have a list of past due creditors among their key suppliers who could virtually shut the company down if they stopped shipping and were willing to forego the possibility of future orders that they’d actually get paid for.
- A key corporate insurance policy has been cancelled for non-payment of the premium, and due to a bad history of claims against the policy. Even an ethical insurance company would have trouble with this one. But the owner thinks they can save money by finding a different insurer. Their broker says “Good luck.”
- As for many B2C companies, their busy season is approaching and cash to buy inventory is in short supply. They could miss the whole season unless everything falls into place soon.
- There is no financial department in the company, and accounting data are pretty much handled by whoever drew the short straw. They haven’t had a credible financial statement in months.
So, do you want to buy this company? I bet you could get it for a bargain price. And time would tell if it was a bargain or a train wreck. But, if you were still looking to buy this company, you should require:
- A credible financial statement with some verification of all significant assets and liabilities,
- The personal guarantee of the seller for any surprises, backed up by an escrowed share of the purchase price, and
- An earnout for as much of the purchase price as you can negotiate.
But if you’re the seller, you should as a minimum fix a couple things before you go looking for a buyer, despite your desire to celebrate the new year on your own south pacific island:
- Fix your accounting, at least for the assets that constitute the majority of the value of your company, not based on your books, but in the eyes of any knowledgeable buyer (this may mean actually hiring an accountant or two to get things on track and keep them there), at least for 6-12 months,
- Settle your insurance situation and ensure that no claims were filed or are anticipated during any period that you were not covered, and buy a “tail” to protect you personally after the sale, and
- Negotiate paydown agreements with all your key past due creditors, so they’re not a club your buyer can use to pound down the price, even if it means committing a chunk of your purchase price or getting an SBA loan that a buyer would be able to assume. OR you could assume those obligations personally, but that would tie you to the company that you want to get away from.
No easy answer for either side of this deal. As the Farmers Insurance pitch man says: “We know a thing or two, because we’ve seen a thing or two.” Just ask us.
We are Your CFO for Rent.