Signs of the Times - April 2012 - (Page 82)

Anatomy of an M&A Failure How the sale of a good sign company can go bad By Rock LaManna I’d love to present yousuccess sign-company merger with a and acquisition (M&A) story. But sometimes, you need to learn from other’s mistakes. As you read this tale of a good sale gone bad, remember, this didn’t have to happen. In fact, it shouldn’t have. This specialty, electric-sign company was poised for a perfect M&A opportunity. The owner/seller had built a solid book of business for nearly 25 years. Besides having established some great, long-term relationships, he’d also developed a very talented staff that helped his well-oiled machine yield more than $2 million in annual sales. He was ready to sell the business and hoped to add to his financial security. His family had some health issues; it was time to pass the business along. But when it was time to sell, the owner made some significant mistakes. Instead of seizing some fantastic opportunities, he missed out. Here are the critical mistakes that turned this potential success story into an ongoing M&A failure. Mistake #1: Not knowing what you’re worth The starting point for any M&A is price, which should be an impartial assessment of your business’ value. When it’s calculated correctly by an independent, accredited and reputable appraiser, subjectivity should be removed. Unfortunately, the seller didn’t use an independent appraiser. He set his own price and was entirely unrealistic in two ways. First, as happens too often, he based his current value on past performance. He first set a price in 2009 – $3.2 million for the business, including $2 million in real estate and $1.2 million in business assets – but based it on 2007 results. He didn’t consider how much the economy had slipped, nor that a return to 2007 levels wasn’t going to happen anytime soon. Second, his multipliers were wrong. At the time, the sign-industry multiplier was 2-4 times the EBITA (earnings before interest, taxes and amortization). The owner chose a fantasy multiplier of 10. (Today, the multiplier is 2.5-5, partially because few quality businesses are for sale.) Because he could not validate past or projected values, he immediately lost credibility with buyers. But his next mistake only compounded this first problem. Mistake #2: Inflexibly – Refusing to negotiate All of us have, at least once, lost perspective of a situation. You might think your favorite football team 82 SIGNS OF THE TIMES / APRIL 2012 / www.signweb.com is unbeatable, and then you watch in horror as they’re dismantled by an underdog. It happens frequently. The difference between long-term success and immediate failure is making necessary corrections. When the seller overestimated the value of his company, he should have adjusted and accepted what the market truly offered. Nevertheless, he proceeded, and retained a broker to help market for buying prospects. Efforts included a targeted marketing campaign for what the broker considered a synergistic buyer. Using social media, association networks and the offer of co-brokerage opportunities, outreach occurred. The seller received two offers. The first, for $800,000, was for the business only, no real estate. The second was for the entire package at $2 million. Both offers were solid, yet both were rejected and even considered insults. Based on the valuation, they weren’t. But the seller refused to even consider the offers, or negotiate for a better one. That was a critical error; first offers tend to be the best offers. The seller should have negotiated, negotiated and negotiated some more until a deal was reached. Instead, he walked away. He wouldn’t make a deal until his number was met. So he waited and waited. Today, he is still waiting. The business is still on the market. Mistake #3: Not creating a win-win situation The seller wanted a lofty price. In his eyes, he had every right to ask for that amount of money. He’d built a $2 million+ company, with a commission-only sales force and a series of established, long-term accounts. Although his business presently served his needs, he didn’t realize there was no guarantee for long-term success. He had no marketing plan or vision for the business. He had nothing beyond all the eggs resting in the baskets of these established clients. If those clients left, he had no Plan B to replace them. The seller knew the business’ successful track record, but he couldn’t demonstrate how it would work for the prospective buyer. Perhaps if he had developed a synergistic, long-term growth plan, the buyer would have liked the prospects and made the buy. But it wasn’t developed into a win-win situation. Mistake #4: Not trusting your advisors As a sign-company owner, you can’t be expected to execute an M&A process. Nor should you. Your time should be spent growing your business and developing a highly profitable, growing organization. http://www.signweb.com

Table of Contents for the Digital Edition of Signs of the Times - April 2012

Signs of the Times - April 2012
Contents
ST Update
Technology Update
Vinyl Apps
Strictly Electric
LED Update
Technology Review
Software Update
Sign Museum News
New Products
Times Square Update
That Sign is Fine (Art?)
Victory at Yorktown
Temporary, with Permanent Appeal
The Value of Signs
Anatomy of an M&A Failure
Industry News
Advertising Index
Editorially Speaking

Signs of the Times - April 2012