Tracy got an offer she couldn’t refuse, ending in a deal she hated
NB names and details are fictional. Any resemblance to actual persons or events is entirely coincidental!
Background
Tracy ran a growing and profitable marketing agency.
Clients were happy. Staff were happy. All was well.
Tracy got an out of the blue £1million offer for her business. A competitor that pparently had money waiting, keen to buy ASAP!
She’d never considered selling before, but couldn’t deny she was tempted. Leave behind all the stresses of running the business, and walking off into the sunset with a cool £1million!
Her husband thought it was a great idea. Imagine what they could do. Clear the mortgage, help their daughter with a house deposit, travel the world, all with money to spare!
What happened
After sleeping on it for a while, she contacted the competitor, saying she was interested.
“Great!” they said. “We’ll be in touch”.
Tracy started making plans for how to spend the money. She told her friends and family she’d sold her business for £1million. They were so proud!
Her focus on the business reduced. Soon it wouldn’t be hers anymore…plus she was now planning the next chapter of her life.
A while passed, and Tracy didn’t hear further. She chased up the buyer.
They asked for key non-public financial information. Seemed reasonable, so Tracy provided it.
Another month passed without response. She chased them again.
“Your business financials aren’t as strong as we expected. We’ve revised our offer to £750k.”
“Oh” Tracy thought…that’s annoying. Well, £750k is still a lot of money. She pressed ahead.
…more time passed…
Tracy got agitated. She’d moved on mentally, but nothing formal had changed. Staff noticed she seemed distant.
She chased the competitor for an update.
“Sorry, we’re still interested, but have several acquisitions going on at the moment. We’ll be in touch soon.”
Ok, maybe this was positive…they’ve done this before, so should make it easy.
…more time passed…
Staff asked Tracy what was up, as she increasingly wasn’t her normal self. After umming and ahhing she told them about the buyer. She tried to comfort them that she’d do her best to ensure they all kept their jobs.
The employees were nervous, but at least they now knew what was going on.
Tracy’s lack of focus on the business meant general business improvements/progress dried up. The number of new client enquiries dwindled.
Uh-oh, a key employee handed their notice in. They assumed redundancy would follow the acquisition, so got ahead of things rather than be left in the lurch.
This left a hole in the business. Quality and quantity of work output dropped as others tried to pick up the slack.
Tracy didn’t know what to do. The buyer would surely have sufficient staff to deal with things nicely, so seemed daft to go through the cost and effort of recruiting and training someone now.
…more time passed…
A couple of their bigger long-term clients left due to the reduction in service.
Tracy chased the buyer again, less politely this time.
It seemed good news, they were now ready to press ahead. Phew, hopefully Tracy could soon get the £750k cash and be done with it.
“We’ll pay 50% on completion, 25% a year later, and the final 25% two years later.”
Oh…this wasn’t explained at the outset. However, having asked around, Tracy discovered this was normal. She didn’t need all the cash right now, so it wasn’t a huge problem. She agreed.
The buyer asked for updated financials. Groan. Tracy provided these.
…more time passed…
Good news, sounded like they were now ready to do the deal!
They got round the table, Tracy ready to sign. The buyer pointed out their due diligence on the more recent figures showed last couple of months weren’t great. Of course the loss of two key clients had had a sizeable impact on turnover and profit.
The downward trend meant they reduced the offer to £600k. Tracy was gutted. Another drop…but what could she do?
Theoretically she could pull out of the deal and continue to lead the business, but she’d lost all interest in running it.
She was nervous how long it might take to find a new buyer, and potentially go through all this again.
Plus this competitor now knew so much about how they operated, their profit margins, their clients.
She reluctantly signed on the dotted line, for £600k.
They paid her the 50% up front, so she got £300k cash now. Enough to clear her mortgage, so that was great, but not her other plans.
Her accountant pointed out she had capital gains tax to pay. Fortunately she qualified for business asset disposal relief, so it was just 10%…but still, that’s £30k gone that she hadn’t considered.
…a few months passed…
Tracy got an upset call from one of her employees. Most of the team had been made redundant, due to “synergies”. They were devastated, and furious at her, as she’d sold them out.
Tracy felt sick. She cared about her staff…and now most were unemployed, whilst she was grumbling at only getting £600k instead of £1million.
…more depressing months passed…
The anniversary of the sale approached, and Tracy chased her next £150k instalment. The buyer pointed out the clawback provisions, she’d only be paid based on clients that remained with the firm.
The buyer had doubled fees to all her clients. Some stayed, unsurprisingly most left. Tracy’s follow up payments reduced accordingly.
“But they only left cos you made them leave by hiking the prices?! That’s your fault, not mine!” Tracy said furiously.
The buyer calmly pointed out it was just business. They needed to increase prices to recoup costs of purchasing.
The £150k payment Tracy was expecting turned out to be just £50k. She spoke to her accountant. Yes, this seemed correct based on the agreement, and yes, further tax to pay on it.
All of a sudden the big house deposit she’d promised her daughter was looking more modest. And given their pensions weren’t enormous, they decided not to proceed with the round the world trip.
A year later, Tracy had become cynical enough to not be surprised to hear she wasn’t entitled to any of the final 25% she’d previously expected.
- The £1million initially offered ended up being just £350k, less tax.
- The staff hated her, some had lost their jobs, others didn’t like their new boss.
- The brand she’d worked so hard to build was dead. It was merged into the bigger business.
If only there had been another way where things went so much more positively…
What she could have done differently
A few key things would have been very different had Tracy sold to an EOT:
- Tracy would have been in charge of the timeline. No risk of it dragging out.
- there’s far less intrusive due diligence.
- the sale price won’t reduce (unless founder wants to, to benefit staff).
- staff would control the business. Risk of redundancies should be greatly reduced.
- they’d likely want to continue with the existing, well respected, brand name.
- there’d be zero tax to pay by Tracy on the sale proceeds.
- whilst payments would be over a longer period, risk of clawbacks is lower.
If the business was independently valued at £1million, and staff (with Tracy’s support) could run it well for the foreseeable future, Tracy could have got the full £1million she wanted, with no headaches!
If only she was aware of EOTs!!
Moral of the story
To be fair, if a good business broker was involved in the trade sale, many of Tracy’s issues could have been prevented.
Most problems were caused by naivety. Hearing the big sale offer and considering it a done deal, whereas the buyer was just speculating.
However, where you’re reliant on an external third party, whose motivations are opposed to yours, problems can arise.
Experienced business buyers can prey on novices. Luring you in with generous offers that will bear little resemblance to the final deal…but you’ll be sufficiently committed to sign anyway.
Other Go EO founder flops:
Summary
Trade sales can work well, of course. But be careful.
- Initial offer will never go up, instead often be gradually reduced.
- Timeline can be dragged out, even if you’re keen.
- Rarely 100% on completion, normally instalments.
- Clawbacks can significantly reduce later instalments.
- Staff jobs often on the line, “synergies” = “redundancies”.
- Your brand will normally disappear, be absorbed into the buyer’s.