Case Study: A Family Business Deal Goes Wrong
Most case studies are success stories. And for a while, I thought this story was going to be one of them. Unfortunately, this deal failed to cross the finish line.
Instead of using real names, I will simply outline the events as they unfolded and share lessons learned from this unfortunate (but all-too-common) deal breakdown.
The Story
Company A is a mid-sized printing company in a small town in the Midwest. The company offers a mix of design, marketing, and commercial printing services to small businesses throughout the region. The company’s owner does a nice job of marketing the business and is always looking for good opportunities to expand.
One opportunity came his way from an unexpected source: A delivery truck driver.
The driver was delivering hay for the horses owned by the wife of Company A’s owner, Mr Jeff.
After he pulled to the loading dock, the truck driver exclaimed “Hey! Is this a printing company?” He told Mr. Jeff he knew about a printing company (Company B) in a town about 50 miles away that was looking for a buyer: “Would you be interested?”
When Mr. Jeff reached out to the married couple that owned Company B, they immediately hit it off. The Company B owners were in the ‘80s and ready to sell. Their son was currently running the printing business for them. But his heart wasn’t really in it. He wanted to do other things.
When Mr. Jeff asked the owners of Company B how much they wanted for the company, they said $1.5 million. So, Mr. Jeff went to his bank to apply for the loan he would need to buy the company. The bank said they wouldn’t loan him any more than $1.2 million.
At this point, Mr. Jeff contacted the LaManna Consulting Group for advice. Because of our expertise in the printing industry, he asked us to provide an informal “opinion of value” based on the Company B’s finances and assets.
Our team was shocked to discover that Company B had failed to install any new printing equipment since purchasing four offset presses in 1995 .Our experts estimated that these presses have about 3 years of useful life remaining. So we advised Mr. Jeff to offer Company B $500,000 instead of the original $1.5 million asking price. We also recommended that he not pay any more than $750,000.
Mr. Jeff was happy with this advice, because it would have cost him at least $750,000 less than what he initially planned to spend.
After evaluating Mr. Jeff’s $500,000 offer, the Company B owners asked for $750,000 instead. Mr. Jeff agreed.
Unfortunately, 9 months had transpired between the time Mr. Jeff and his bank had discussed a possible loan of $1.2 million. Economic conditions had shifted so dramatically that the bank was no longer willing to loan Mr. Jeff the $750,000 needed to acquire Company C.
So, as much as Mr. Jeff personally liked the owners of Company C, he faced the unpleasant task of informing them the deal was off. Just imagine how painful this news must have been to owners of Company C as well as the son running the business.
Lessons Learned
Time kills deals. That’s why sophisticated buyers have processes in place to get deals across the finish line in six months or less. So many variables are in play during a deal that buyers and lenders can change their minds in a heartbeat when a deal drags on without closing. .
Sometimes, the seller feels emotionally unprepared and overwhelmed, and chooses to walk away. In this instance, the buyer had time to uncover details that diminished the value of the company being acquired.
Owners should always be prepared for the unexpected. Sellers like to think that they are in control, and will choose how and when to sell the business. But that’s not always true. Owners suffer heart attacks or die in traffic accidents and the heirs must put the business up for sale.
Or a buyer reaches out with a very attractive, “once-in-a-lifetime” type offer that you didn’t expect. Even if you don’t feel emotionally ready to sell, is the deal too good to pass up?
Business owners should think about how they would handle any of these possible scenarios.
Independent valuations are a must. The seller almost always believes the business is worth more than it is. An inexperienced buyer may agree to the seller’s price, but a smart business buyer always seeks independent confirmation of the value of the company being acquired. It doesn’t have to be a costly, full-blown formal evaluation. But you should at least get an “opinion of value” from an experienced print business valuation expert in your industry.
Keeping up with technology matters. Buying new equipment doesn’t automatically create business growth. But we do know that part of the valuation of your company will be based on the age of your production equipment. If your printing equipment becomes so old that it’s hard to find replacement parts, that’s a problem that a buyer won’t want to deal with.
Informal, do-it-yourself deals don’t automatically save money. It’s OK to start the ball rolling on an owner-to-owner sale on your own. In fact, this is a common practice.
But both the seller and the buyer should have credible and experienced business advisors who understand the types of legal, tax, and estate issues that can arise if certain details weren’t probably negotiated during the transaction. Potential problems overlooked during the due diligence and negotiation processes can have long-term repercussions after the deal is done. .
In this case study, the only person relieved about the outcome was Mr. Jeff. Our opinion of value and the lender’s financial discipline kept him from making a potentially costly mistake.
To learn more about the process of buying a printing business, download our FREE whitepaper, Acquisition Criteria for Printing Companies.
Or reach out to me for ideas about how the LaManna Consulting Group can help you find acquisition opportunities that match your strategic objectives.