Home Mergers & Acquisitions Why companies sell for less, or don’t sell at all

Why companies sell for less, or don’t sell at all

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Why companies sell for less, or don’t sell at all

Sometimes, that bright shiny idea you had—to sell your business and feast on the after-tax payout as a reward for your life’s work—can become a tarnished penny if you put your company on the market and it doesn’t sell, or you get offers way below what you expected. We have heard of recent deals that are getting offers at multiples at 1X to 1.5X EBITDA below what has been an industry standard, which has lately been around 5X. Why don’t these companies sell getting top dollar, or sometimes not selling at all? Here are a few reasons:

Recession. Acquirers are pricing in a recession, which is surely in our future. It’s an unavoidable part of natural business cycles, as much as it may be forestalled by goosing the economy with tax cuts and adjustments to interest rates. Since an acquirer is likely going to maintain ownership of your business for a number of years, they are actively modeling how it will perform in a downturn. Essentially, they are not buying the company for how it is performing today; they are pricing in how it will perform over near-term time periods under their new ownership. Since there are so many variables that they can’t predict, they are hedging their risk by offering less, playing defense against potential slower performance.

Margins. Prudent acquirers are very careful to target companies whose gross profit margin and EBITDA margins are around the same as theirs, landing in a sweet spot the acquirer is comfortable with or can bring up to expectations. In a historically low-margin business like lumber and building materials, even one or two percentage points off EBITDA target will sour an acquirer’s appetite for the purchase, or motivate them to reduce the multiple of EBITDA they’ll pay. This is true not only of EBITDA margins but of gross profit margins as well. Acquirers will pay a premium only for performance that matches their expectations.

Leadership. Most acquirers will want to examine the EBITDA performance of a target company for a period of time when it was under control of the leadership team that will remain in place post-acquisition. In other words, if you, as an owner/leader, are leaving the company after you sell it, it’s important to implement a succession plan with enough time for the new leadership team to demonstrate their operational ability. If you don’t have a succession plan in place, or if you installed a new team too close to the sale of the business—allowing no time for a prove-out—expect a haircut on valuation. Worse, if you have no succession plan at all, and the incoming new owner gets even a whiff that your leaders are jumping ship after the acquisition, expect a crew cut; actually expect your head to get shaved! You may even find that the acquirer completely walks away from the deal.

Aging equipment. We often see companies sell that have taken money out of the business when they should have re-invested in modernizing equipment, such as rolling stock, saws and milling stations, safety equipment, building upkeep, and regular maintenance. When equipment isn’t maintained, the acquirer will price in the investment they will have to make, and then lop that off your EBITDA line as an expense they will incur. Since companies are bought at a multiple of EBITDA, every dollar removed from the EBITDA line has a negative multiplier effect on the value of your business. Equipment investment and proper maintenance are nearly impossible to hide, either during initial site visits, or during the due diligence process. We have seen acquirers walk away from a company based solely on the poor equipment quality.

An old fashioned low-ball. Any business person worth his or her salt wants to see companies sell on the cheap, and if they sense that an owner just wants to get out (as opposed to a seller who exudes patience), the acquirer may throw out a low bid, or a series of low bids during the back-and-forth, probing to just “the bottom” of where the owner will go to simply cash out of the business. Sellers, beware when making comments like, “Oh we just want to get out of it,” or “We are not looking for the top of the market here,” because that’s music to an aggressive, savvy acquirer’s ears.