Joe was a franchised print shop owner for twelve years before selling out of desperation. He compounded his problem by using the Ouija board approach to choosing a buyer (last month’s article) and now he chooses the wrong way to sell along with a couple of other bad decisions. Hopefully, we can learn something from his misfortune in “How Not to Sell a Business.” Here are a few excerpts about what went wrong. Not enough space to cover them all.
To start with, Joe sold the new guy stock in his closely held corporation instead of entering into a “bulk” or “asset” sale. So what? Well, the biggest problem with a stock sale usually falls to the buyer. Like what? Oh, any tax liability or environmental issue can be passed through to the buyer whether they know about it or not so regardless of how much due diligence one does, there’s always the unknown.
That’s why most buyers want to protect themselves through a “bulk” or “asset” sale where the seller sells the producing assets of the business. In short, the old business ceases and a new business begins and no unknown liabilities pass through. That’s the up side.
Downside is that workers are sometimes surprised when they find out they cease employment with the old company and have to apply and begin their service over again with the new one. Any accrued vacation, pay or whatever is owed by the old company and the new company’s policies now govern.
Another thing is that the old company keeps all of the working capital (current assets and current liabilities) and settles their accounts. They still collect the receivables and pay the payables and taxes owed of the transaction date. Often this is done seamlessly with the buyer and seller cooperating by sorting out who gets what during the first few months after the transaction. Regardless of how it’s done, the new company starts, well, anew. Okay, with that background, let’s pick up with ole Joe and his story.
Joe figured the buyer had enough cash because he had the same as Joe did when he started. That was a bad call because it depends on what the business needs now.
He also agreed to finance the buyer. Joe figured it couldn’t go wrong with the franchise’s help. Well, what went wrong was Joe focused on the buyer’s personal attributes. Buyer is smart so he’s golden. He failed to realize he was entering into a financial deal. What collateral did Joe get? None is the answer.
Buyer Said He Was “Bullet Proof”
Joe even was warned when the buyer said things like, “I need to protect myself” and “I’m bullet proof.”
Geez, if you are going to finance, get some collateral. Joe didn’t because, in my opinion, he was too desperate to sell.
At the first attempt at closing, the buyer reneged because the receivables were too low and he didn’t want to count anything over ninety days. First time Joe had heard about that. It ended badly as Joe said he pulled a “nutty” and left. Remember, though, Joe was desperate so he came back around and agreed during a second closing.
Hate to say Joe was incompetent, but here are a couple other items. Buyer refused to use his house as collateral and didn’t provide anything else. Believe it or not, the buyer never was in the business to see how it ran. He never asked questions about operations. And, he never talked to Joe about the business.
Results of “How Not to Sell a Business”
Well, after the closing finally happened; Joe worked there for a month. Joe said the buyer still never asked him anything about the business. Instead, Joe said, the buyer had a plan to change things and did; new furniture, computers and filing systems.
Within two weeks of Joe finishing his month, the biggest customer left. The new owner said he was in control of their artwork so the customer wouldn’t leave. He was wrong.
Here’s another beaut: Joe agreed that the buyer could make offsets to the agreement but there was no discussion as to what. The buyer just paid one month and then declined to pay the others because of “offsets.”
Six months after the transaction, the buyer abandoned the business without a work. Three months after the buyer left, the business was back in Joe’s hands, but it was impossible to revive since customers had moved on.
Joe not only was left with a mess but the leasing companies, landlord and other creditors were after him because he remained as a co-signor.
Lessons: sell from a position of strength; not weakness. If your business is a loser; don’t expect someone to fix it and pay top dollar. If you’re going to sell; sell it in a real transaction. If it’s a loser be sure to do a bulk sale. And if you finance, get real collateral or don’t do the deal. Come on, Joe.
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If you would like real help in preparing your business for sale, it’s available. Best place for printing and sign companies to start is with CPrint® International’s Two Day Challenge. Click Here for information. Or email me at email@example.com or give me a call (304) 541-3714.
Other articles in this 2 part series
Part I, How not to Sell the Business Click Here
Part II, How not to Sell the Business Click Here