THIS WEEK IN BROKEN DEALS

Here’s what’s in store for this week:

• Announcement: Reply to this email to get a free copy of our new ebook, The 10 Commandments of a Sellable Business

• Best Link: 10 warning signs of cultural issues that could put a company’s success—and investors' returns—at risk

• The Graveyard: When sellers think their exit is a “get out of jail free card”, deals tend to die. We go deep on the 3 biggest categories of seller madness so you can steer clear of them.

• Work With Us: We recently started a program for M&A Advisors and Brokers to get Wall Street level deal analyst help on a success-fee basis. See more below.

ANNOUNCEMENT

Join the waitlist for our new ebook, The 10 Commandments of a Sellable Business!

This ebook contains the main principles we’ve uncovered analyzing hundreds of broken deals. If you’d like to receive a free copy, simply reply “Commandments” to this email and you’ll be added to the list when we launch. 

In this new ebook, we’ll describe the 10 things you must avoid to close more deals, including:

• Why focusing on price is often a mistake and how to use it to your advantage to speed your deal to a closing

• How to manage your team through closing so your sales stay strong

• The mindset every selller must have to guarantee a successful exit (and why avoiding it can cost you millions)

• And more…

Reply now to this email with the word “Commandments” and we’ll put you on the priority list to receive a copy as soon as it launches.

BEST LINKS

Matt’s Favorites

• List of free cheat sheets for some of the best business books ever (LinkedIn)

• Want a tax-free exit? Learn about QSBS under IRC Section 1202 (LinkedIn)

Finance & Capital

• Secret CFO breaks down the 7 step process he used to manage the KPI dashboards for a $100bn business across 3,000 operating (Twitter)

• Small PE funds in the lower middle market are crushing other asset classes (LinkedIn)

Salability

• 10 warning signs of cultural issues that could put a company’s success—and investors' returns—at risk (LinkedIn)

• Private Equity Due Diligence: a roadmap (LinkedIn)

THE GRAVEYARD

A Deal is NOT a “get out of jail free card”

In the world of business sales, there’s a delusion that floats around the minds of many sellers: that a deal is somehow their golden ticket out of whatever mess they’ve gotten themselves into. They think they’ve found their own “get out of jail free card,” and that simply selling their company will solve all of their problems. Spoiler alert—it rarely works that way. The reality is, no savvy buyer is going to let you off the hook for your bad decisions, outdated operations, or failing marketing strategy. If you’re expecting that, you’re in for a rude awakening.

Here are the three categories of deals I’ve seen play out where a Seller boldly expected the Buyer to come in and save them from a terrible situation:

Category 1: The price is based on…

The first category is simply a special kind of error in pricing - as opposed to overvaluing a business because of a lack of market knowledge, the Seller doesn’t even claim the value is there. They will literally announce a reason having to do with their personal situation irregardless of the underlying business situation as the reason the price is the price.

"Get out of debt": A business was performing poorly, and the owner made the correct decision that the operations would either need to be ceased or someone else was going to have to take over the company in a turnaround scenario. I was happy to help, but of course understood that the best we could expect was Asset Value for the company - there were no operating profits to speak of, so no “Multiple of EBITDA” was possible. 

Everything was going fine, CIM getting done, equipment and intangible assets lists getting produced, etc., until one day the Seller called me up and inquired about the listing price. We had a recent appraisal of the property, and there was legitimate Real Estate value (plus some hard assets on top), and the listing price on the CIM was simply the fair market value of the assets. He didn’t dispute the method I had used to propose an initial price, but had a much different comment to make - “But if I sell it for that, I’ll lose money. We owe the bank more than that.” 

The conversation was very difficult, and lasted months. The fact is, we eventually sold that company at a price very similar to my initial listing suggestion, because that was what the assets were clearly worth. The fact that the Seller was going to take a haircut on it was brought up many times during the negotiation and proved completely ineffective - the Buyer was buying assets, not getting the Seller out of a ditch. 

"Retire the way we want": A business I was evaluating with a partner checked a lot of boxes - right location, industry, size, and EBITDA value. During the site visit, things were going great with good rapport all around. There were some discussions on financials, and everyone came to the same general conclusion on what cashflow was for the company.

To our very great surprise, the price the broker offered up for the company was then TEN TIMES cashflow - for a rural company with earnings less than $1,000,000.

“Isn’t that… quite a bit above market?” we asked, astonished. 

“Oh sure,” the Seller sitting across the table answered, “we know a lot of people are selling companies for a lot less than that, but we looked at our numbers, and for us to retire and never work again, that’s what we’ll need.”

We passed pretty quickly on that deal once we confirmed through a couple conversations that both the Seller and the broker thought the “retirement method” of valuation was a legitimate way to price a company.

"Repay a recent investment that hasn’t paid off": Advising a client on an acquisition in Texas, and the deal was moving nicely. Great little opportunity, strong niche, and very close to his current house. 

There was a little hair on the deal when it came to the quality of the bookkeeping, but we trudged through, paid some money to an outside firm, and got the numbers figured out. 

Everyone was feeling very optimistic about the deal - site visits had gone well, and our client was getting elbows deep in researching the industry nationally and thought there was a legitimate growth play here by expanding the local operations regionally into some other Texas Metros, and possibly country-wide expansion starting in 5 years. 

Even conversations about pricing were going pretty well. After we took the outside firm’s numbers to the Seller, he was fairly receptive to the EBITDA calculation we were suggesting, and was also amenable to a fair multiple on that. 

Until one day, he slips in on a call that the EBITDA Multiple price we were suggesting was totally fine, but he’d need an additional amount of money to pay him back for inventory. We thought this would be a pretty simple conversation, cause even his own broker had informed him that in this situation, we were buying a “going concern” for the cashflow, and that included the inventory needed to operate the business. 

“I get that - but I’m not talking about that inventory. Remember when I said I rented a warehouse a couple years back? I stocked up on specialized materials and the thing’s full of it.”

We had seen an increase in inventory on the financials, but thought it was simply in the normal course of business. Now we hear what really happened - the owner had bought nearly a million dollars of “bulk”, slow moving items that he thought was a genius idea at the time. Now, 2 years afterwards, and selling less than 5% of those over the 2 years, he wanted ALL his money back. The reason? It was nearly a year’s worth of his earnings, and he simply couldn’t accept that this bad business decision wouldn’t get passed on to the next buyer. 

We passed. 

"Reap the profits we should have made while operating": Very early in my career, I was pretty far into a small deal. I had actually even taken some shifts working at the company to get a feel for what it would be like to own it, and I was building a good relationship with the Seller. 

I took a very hands on approach to the deal, and every conversation with the Seller was in person, in their living room in fact. For the most part, I thought I had checked every box to get a deal done. The price was settled, management transition was settled, and we had even gotten to the point where she and I were discussing 1-3 year plans for the future of the company and where the most fertile ground was to find new customers. 

Then, I get an email from the seller’s accountant. Long story short, the gist of the email was the following: Don’t you know how long and how hard the Seller has worked this company with not nearly enough to show for it? 10 years of effort, you need to pay her for that. 

Basically, the idea was that the “new” price was the fair price that the Seller and I had negotiated face to face, PLUS… tens of thousands of dollars per year in additional earnings that she “should” have made, that I needed to reward her for now. 

You guessed it. I passed.

Category 2: "Hot Potato" mentality - Sellers trying to pass off existing or future problems to an unsuspecting buyer.

The Second Category is what I call the “Hot Potato” - named after the childhood game where players pass around an object with a timer. The one who ends up with it in their hands at the end when the time runs out loses. 

Would any of you be interested in the following deals?

Aging Equipment : We were working on a deal to buy a manufacturing facility with a partner. Things seemed in place, and we could tell the Seller definitely wanted out. Typically, in a scenario in which the Seller has truly decided to sell, a lot can get done, because the other “option” (that of keeping the business) isn’t there in the back of their mind. 

Normal work was getting done, until we talked about EBITDA and honed in on depreciation - a MAJOR concern in the manufacturing space. How long will the equipment last before significant investment needs to be made again? 

Good thing we asked. 

The equipment was all at the end of its usable life - meaning in the next 5 years 100% of the facility was going to need to be repurchased. The owner was pretty clear about this - he wanted to sell the company now so that the future owner paid for all that, not him.

We were deadlocked and had to move on.

Outdated Business Process : This was a similar deal and a similar scenario, with a twist. A printing firm out east was up for sale and it seemed like a decent little company. Once we got into more significant diligence though, we had a very unique conversation with the buyer. 

The equipment was all in good working order due to meticulous maintenance throughout the years, and the practical usable life of the equipment was effectively infinite - if you kept repairing it, it would work forever. But the owner was good enough to give us the following warning - new presses and other items had come out which made it increasingly hard to compete in the market. If we didn’t plough effectively 100% of earnings back into the company for the next 3 years, we wouldn’t have any customers left. 

Still though - pay me what it’s making now, and you take care of that!

Again, we had to pass.

Ineffective Marketing Strategy : A company with good financials was using historically effective marketing strategies (analog outreach marketing, word of mouth, etc.) and had a long operating history. 

Unfortunately, times were changing. They knew they needed to make a digital transition (website, email lists, etc.), but were really hoping the new buyer would take that on. 

We skipped the deal, but the same company was on the market again a couple years later. Checking back in on revenue, it was down over 50%. 

The business was running on fumes and anyone who made the purchase would have gotten completely wiped out.

Double pass.

Category 3: The Business is already dead, would you like it?

The third category is my favorite - the business has already died, but, you know, pay me for it anyway.

Losing a Major Customer: My partner and I were evaluating a deal which was definitely in our wheelhouse. Fit every major deal consideration (geography, industry, size, etc.) and the owner was friendly and appeared motivated to sell. 

Looking through the financials, they had a rich history and, though sales had been pretty flat the past few years, the numbers were themselves pretty strong. The most recent year was missing, though, from the CIM materials, but we thought that was probably just because it hadn’t been updated recently. 

The broker was skilled and tough. He put us through the ringer in terms of proving access to capital and said his job was to protect his client from tire kickers. Fair enough. 

During our site visit, the owner was affable and fun. We got a great walkthrough of the facility and a good overview of where the owner had taken the company over the ups and down of a 40+ year career. 

At the very end, he dropped this bomb: Sales were down 90%, his biggest longtime customer had canceled all orders, and for the past 6 months there had been effectively no revenue. That’s why the financials were missing - they felt like if they showed the actual state of the company there wouldn’t be any interested parties. 

Yep.

Losing Employees Due to Personal Issues: A prospective client called in to discuss the state of his company, and he led with the idea that he thought it was probably time to sell.

My ears perked up, of course - I love the work of taking a great company through the effort required to really showcase the value that the owner has created and bringing that out to hungry buyers looking for amazing assets. 

The prospect continued along - Hot industry (eCommerce), really impressive growth, legitimately high sales and profit numbers, and a ton of ideas that a future owner could capitalize on. 

So why was he sighing over the phone every 60 seconds? He sounded like a gravekeeper, not someone who was about to harvest for millions of dollars. 

“So… there’s some things I haven’t told you yet…” 

This was going to be good. 

Over the next twenty minutes the young entrepreneur told me the real state of the company. The history, presumably, was factual. Good sales and profits. However, what had happened over the past year…

Every employee at the entire company, every single one, had left. I have no reason to get into someone else’s personal demons on this newsletter, but the owner had managed to burn over 20 bridges and produce such a high pressure and awful work environment that one day in the middle of the busiest season he’d ever had, they staged a massive walkoff - and not just line workers. All the designers and skilled positions had exited as well. 

There literally was no business - just a warehouse full of half finished products that had been sitting there nearly a year, untouched.

The conversation went in circles for over an hour - I talked liquidation, company re-formation, everything. 

But that’s not what the prospect wanted - they wanted to sell, sell as if none of this had ever happened, and sell for a price for what he felt like he should have gotten had he managed to time his exit perfectly they day before it imploded on him.

Conclusion

In the end, if you think selling your business is a quick fix for years of missteps, bad bets, or just sheer neglect, it’s time for a reality check. Buyers aren’t blind to the “hot potatoes” or the dead weight disguised as “opportunity.” They’re investing in what your business is now—not what you wish it was or think it could be in someone else’s hands. So, unless your balance sheets and operations can genuinely back up your asking price, prepare to let go of your “get out of jail free card” fantasy. Because here’s the real takeaway: a buyer is only paying for the business as it is—not the bailout you wish it would be.

THAT’S A WRAP

Before you go: Here are 2 ways we can help

Is your deal stuck? We may be able to help. Get a free 30-minute deal assessment here — LINK TO SCHEDULE ASSESSMENT CALL

Are you an M&A Advisor or Broker looking for Wall Street-level financial analysis support for your CIMs and client financial info? If so, we offer a success fee-based program to help you close more deals with less overhead. To learn more, schedule a call here — LINK TO LEARN ABOUT SUCCESS-BASED FINANCIAL ANALYSIS