Overview of Situation
The owner/seller had tried to sell his business on his own, and successfully received an LOI (Letter of Intent) from a private equity group for several million dollars. All went well until just before closing when the owner/seller discovered that the LOI had several surprises in the terms that he missed. Specifically, the LOI value included “working capital” that was effectively cash back to the buyer, a stock rollover of 20% where he would buy back stock in the new company, and a “basket” which is a reserve for potential future liabilities. To his dismay, the cash at closing was nearly half of what he expected when all of these things came off the top.
18 months later after the deal died the owner/seller engaged Pacific Business Sales to represent him as his Business Broker.
Approach & Solution
Pacific Business Sales aggressively marketed the business to entrepreneurs, equity groups, and search funds. The business was marketed both on public business-for-sale websites such as bizbuysell.com, bizquest.com, loopnet.com, and others as well as non-public websites available only to private equity groups. Email blasts were also sent to the BizBuySell buyer email list and the Pacific Business Sales buyer email list.
Pacific Business Sales also prepared a comprehensive CIM (Confidential Information Memorandum) for the business. The CIM is a confidential prospectus that is sent to prospective buyers after they have signed an NDA and provided a financial.
Results & Conclusion
Six offers were presented to the seller/owner and the offer that was accepted was over $1.4 million higher than the LOI the seller had accepted 18 months earlier. The offer that was accepted had substantially higher cash at closing and better terms than the LOI that had been accepted and then fell through.
The offer was in the form of a stock sale which provided significant tax benefits to the seller and the buyer used IRS 338(h) to recapture (step-up) the depreciation, thus minimizing the tax disadvantage of a stock sale to the buyer.