Mama once told me “if it sounds too good to be true, it probably is.” But Mama (may she rest in peace) didn’t know much about selling a business.
When Bobby (not his real name) called, I could tell something big was brewing. “I need to see you today” he said, “I’ll buy you lunch, dinner, whatever, I need to get on your schedule.” We decided to rendezvous at Starbucks and before we had our coffee orders filled, he said “if it sounds too good to be true, it probably is, right?”
Bobby explained that the night before he got a call out of the blue from the CEO of a publicly-traded company he had met at a conference in October. Bobby went on to explain that during the October conference he and the CEO discussed a possible joint venture, but nothing had come of it and he had forgotten about the whole idea.
But the CEO had apparently not forgotten. When he called Bobby he told him he’d like to buy Bobby’s company for 2.5 times last year’s revenue. Given that Bobby’s EBITDA margin was 18%, this offer was about 14 times EBITDA. Eventhough Bobby’s company was growing at 8% per year, he didn’t understand why somebody would drop so much money on him, unsolicited.
Bobby said again, “It’s too good to be true, right?”
I replied “if you sold, what would you do next?” Having worked with many entrepreneurs selling their companies, I know that unless the “after-sale life” is thoughtfully considered, it’s likely the deal will fall apart during due diligence, or if it does close, the seller will have serious remorse within a few months. “I sure do have a clear idea” Bobby said “My wife Janice wants to go back to Syracuse to finish her doctorate, I’d love for her to do that but we can’t while we’re tied down with the business.”
I was impressed with Bobby’s thoughtfulness, he seemed to have a genuine motive to sell. But he kept pressing me “I just can’t believe this offer, would they really close on those terms?” At Bobby’s request, I called the CEO the next day and explained that Bobby wanted me to shepherd the deal through closing, and the first thing I asked the CEO was “why are you doing this?” He got his VP of strategic planning on the phone, and the two of them explained how Bobby’s company filled a gap in their product offering, and once that gap was filled, the CEO could go to Wall Street and raise more equity to establish a European sales channel.
This strategy explained why the CEO was ready to overpay for Bobby’s company …. the CEO needed Bobby’s company to achieve a broader strategic objective. The amount the CEO was over-paying for Bobby’s company was insignificant in the scheme of his larger objective to open the European market.
Every year I get calls from business owners who have received an unsolicited offer that sounds too good to be true. The first thing I ask the owner is to test his/her long-term life objectives relative to the amount of the offer, and if the offer funds those long-term life objectives, it’s logical to go to the next question …. why is the potential acquirer making a seemingly too-good-to-be-true offer? If I hear from the potential acquirer a strategic answer to that question, I see the writing on the wall likely to prove Mama wrong, even when it sounds too good to be true, it might indeed be true.
Moral of the story: If it sounds too good to be true, ask a few more questions.
Tennessee Valley Group
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