I had just completed writing and rewriting my acquisition strategy statement. The first couple of acquisitions were somewhat helter skelter. The opportunities had arisen, I had liquidity as well as access to capital, so I went for them. I have come some distance since that first deal in Estonia in 2014 and the many lessons that deal taught me.
I cannot say that I recall very specifically how this deal came across my desk. I had gotten the information for a few days but didn’t act on it immediately. I sometimes tend to just let things sit, allows me to process then chart my course of action.
The company in question was in the logistics sphere – specifically office relocation and storage. They operate out of the south of London with an annual turnover of circa £2 million, even throughout the pandemic. Pre-pandemic the company was a notch above £2.3 million average. The most attractive part of this deal was the company was sitting on £250k in cash and SDE of £350k on average between 15-17% each year for the past 5 years.
I contacted the broker and requested the financials. I have been very fortunate to have an epic deal team around me. They consist of my partner – his analytical skills amaze me, my finance guru – the former CEO of Zurich Bank UK, my mentor and an acquisition powerhouse – his VC fund holds significant stakes in 76 companies to date and he sits on the board of five. The feedback was a mixed bag. My partner for one wasn’t sure. He had lot of questions, and I mean that as no exaggeration. He literally jumped on Companies House – the UK government site that lists company details and checked every possible competitor. Even though we couldn’t find anyone doing as well, he wanted to reserve further judgement until we had seen the company up close, and all his questions had been answered.
My finance guru was even more surgical, but his concerns lay strictly in the numbers and the potential to maintain current performance and opportunities for growth. I sat down with my mentor, and he had one comment and one question. First, why is it so cheap? Second, in the final analysis, the simpler the business, the easier it is to operate and the easier it is to fit into your acquisition strategy. I reviewed all the feedback and decided to go for it.
The dance
We put an offer in for £950K. I should note this where it started getting interesting. There were two shareholders, one 51 and 49% respectively. The company had been founded by the 51% shareholder’s father and the 49% shareholder came in as an operative and worked his way up from 2% to 49% ownership. He ran the business day to day. He had seen his friends die during the corona virus pandemic and between this and his wife nagging him, he wanted to retire and enjoy a bit of what he had worked so hard for all these years. All my negotiations had been held with him to date and I assumed this information was being shared with his business partner and fellow shareholder.
We arrived for our first site visit to discover that he had no idea if the other shareholder would join us for the day. This should have been a flag, but neither I nor my team paid enough attention to it. As it happens, the second shareholder did make it into the office as we were being given a full walk through, so I suggested we all do lunch. We drove to a nearby diner/pub and after the usual get to know you conversation and then some frank discussion, we (my partner and I) discovered that the offer had not been shared with the majority shareholder. We suggested they talk amongst themselves, and we scheduled a negotiation for the following week.
At this point our offer had been on the table for just over 3 weeks. We sat down and some 30 minutes into our meeting, I almost fell off my chair when we discovered that even up to this point our offer was still unknown to the majority shareholder. To compound the situation, both had differing ideas on what the company was worth. The majority shareholder had been given one value by his accountant; the minority shareholder had been given a more realistic assessment by the broker. Both had signed off on the broker’s valuation of the business when they agreed to list it for sale. Yet here we sat, several months and numerous phone calls and meetings later and neither had had conversation with the other on what value they would accept or if they both agreed with the valuation, they had both signed off on.
Using my very best – Never split the difference methodology, we hammered out heads of terms, came to an agreement that included an agreed value and the opportunity to earn the additional value the majority shareholder wanted on the back end. The deal was a mix of an initial payment and deferred payments over 3 years along with an earn out lump sum payment after year 3. The majority shareholder had some reservations, said he wanted to spend some time over the weekend and read it through before signing off on the heads of terms/MOU. The minority shareholder signed off without hesitation. We walked away, half in disbelief, a bit nervous, but cautiously optimistic that we had just pulled it off. The sentiment we agreed was, now the hard work begins, and we immediately began preparations for due diligence. Except, this is where the wheels fell off.
We left the meeting with the expectation that the deal would be signed off by the Monday or Tuesday of the following week. Prior to leaving the meeting I had been given the business card and contact details of the majority shareholder. I immediately texted him to say that I appreciated the meeting and looked forward to his response once he had the chance to process everything and looked forward to getting the deal over the line. Then all communication stopped. For over week we heard nothing back until finally the broker called to say, while the minority shareholder agreed with our valuation, the majority shareholder didn’t and wanted to get a new valuation on the company, then left for holidays. Months of analysis, deal preparation, weeks of meetings and financial planning, teams ready to deploy and now the deal was effectively off. How could we not have seen this coming? What had we not seen? What black swans did we not uncover?
Lessons learned
Thinking back, there were a number of important signs which we missed and with hindsight, had we better managed or responded to these we might have been in a different place than where things stood. While we maintained a very positive relationship with the broker, he was always kept at arms length. Any attempts he made to influence the process, received immediate pushback with the rationale being we preferred to discuss all issues directly with the sellers. While the adage is, avoid deals involving brokers where possible, I believe a healthy relationship with a broker or agent can in some cases make or break a deal. The broker though acting as agent for the seller is still interested in one outcome; getting the business sold.
Once we learned they had not discussed our offer between themselves, we should have paused the entire process and stepped back. This would have forced their cards onto the table earlier and avoided the needless back and forth which ensued.
In addition, we should have verified much sooner that both shareholders knew and understood the offer that was on the table at the time. This would have ensured no one was being blindsided in our face-to-face conversations and negotiations. I would contend this was not only our failure, but a failure of their agent as well. To the extent that we observed this and failed to act, the blame lays squarely at our feet.
The sellers had mentioned their lack of familiarity with the process, lacked both the expert advice from a lawyer accountant or other professional and basically couldn’t answer even the most basic questions about their financial statements. They were amazing operators, they did what they did well yet, lacked business savvy. While such ignorance can be good in a take no prisoners approach to acquisition, this isn’t my chosen model. I want to walk away from every deal with everyone feeling the process was fair and that everyone got what they wanted out of the deal. Their will always be some suspicion in an acquisition, a fear that everything is not being said and the worry about what is yet to be discovered. For this reason, on deals of a certain size insurance products exist to guard against the discovery of any such eventuality.
It is never a given that transparency will be viewed altruistically, but a seller as an ally is miles ahead of a seller who views you with mistrust. We saw the ignorance and although we chose not to exploit it, could have better prepared the sellers for all the next steps that we would take them through, as well as the next steps in the process. This might have taken the form of information packages or specific issues to go back to their advisors to verify. This would have established credibility, given us a positioned of trusted knowledge resources and established us as allies in the process, wanting the same outcome as themselves, and not just people wanting to get a dirt-cheap deal.
A final note on the offer. We learned later in the process that a large national player had submitted an offer for the company. Their offer was significantly lower than ours, being a play for the cash flow, customer base and location. We had designed our offer on the basis that it needed to be as close to their valuation as possible to maximise their likelihood of acceptance. In hindsight this was a terrible tactic. It created the sense of confirmation in their minds that a buyer existed that was willing to pay their asking price, which emboldened the ask for a higher price during our face-to-face negotiations. Had we anchored our offer much lower than expected it would have tempered their expectations, forced a real internal conversation, giving us room to negotiate a price with a steeper discount than one closer to their asking. In the end, while we did not, the golden rule is still true, never overpay for a business, even if the price paid is less than asking. If the offer is too generous, that’s still overpaying.
Coming full circle
We returned from vacation a week ago. On the way to the airport, we got a call from the broker. The minority shareholder who we had thought was amenable to staying and helping us grow the business really wanted out. He was willing to accept our valuation, so was the majority shareholder. Then came the plot twist. Instead of the minority shareholder staying on to handle the handover period and to work with us to grow the company in order to have an earnout on the back end, the majority shareholder had decided that he wanted more and was now willing to put the effort in to help use grow the company. Obviously, we said yes.
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