Dave and Doug: Quick Q&A on M&A

Q&AA recent lunch conversation with Dave Seitter, a partner with Spencer Fane LLP, and Doug Hubler with Apex Business Advisors, regarding the sale and acquisition process of businesses served as inspiration for this blog and a series to follow.

Dave has been involved with business acquisitions for years and offers a unique perspective from the legal side regarding deals. Doug has also been active in M&A activity for many years and offers a perspective from the deal-making side of the equation.

The goal of this post and future “Dave and Doug” posts is to educate our audience on the art of getting deals done.

Dave: What do you recommend when your client says “I have to have a certain price for the company” while at the same time all advisors indicate the company is not worth the amount the client seeks? How do you level-set expectations?

Doug: We run real numbers for the seller so they can better see that their anticipated value would put a buyer in a real bind financially. Almost every buyer will leverage their personal investment to buy a business and generally get a loan for 75%-80% of the purchase price. So, after debt service, a salary, and required cash to operate the business, there needs to be something remaining for a reasonable return for the risk. How do you handle these clients, Dave?

Dave: Folks will often come to my office with certain inherent beliefs about their business…and frankly, they’re right, because it is their business and they know it very well. Oftentimes in representation there’s a difference between what someone has been receiving from the business vs. what they can obtain from a sale. So we go to the yellow pad test and on one side outline what money they need from the business measured against what the business justifies for a sales price.

Doug: Sellers will often reverse the market price into how many years they would have to work to make the same money. For example, the seller says, “So if I only get $1 million for my business, I could just work 3 or 4 more years to make the same amount.” Absolutely! In our view, this person isn’t ready to sell. True, they could work for another 3 or 4 years, but is that really what they want to do?

We would be happy to sit down with you at any time to discuss business value and the strategy to go to market. If you’re interested, email me at dhubler@kcapex.com to learn more. This process takes time, so the earlier you get started, the better off you’ll be.