Recently I wrote that the private equity company Riverside Group closed only 15 of the 4,228 acquisitions it considered last year.
Why such a high failure rate?
“The number one reason deals fall apart is missing your numbers,” says the chairman of Beringer Capital, Perry Miele, who makes his living buying, selling and occasionally investing in companies in the marketing, communications and media industry.
Mr. Miele shared the story of a client he was working with who was keen to fetch top dollar for his company. Its founder and CEO put together an ambitious set of growth projections for the year, forecasting the business would generate $2 million in pre-tax profit on $7 million in revenue.
Mr. Miele’s firm shopped the company to a number of buyers. Given its projected growth and profitability, Mr. Miele had a number of interested companies make attractive offers. The CEO agreed to one offer and entered a 90-day period of due diligence, during which the acquiring company had exclusivity to investigate the CEO’s claims without other companies making bids.
As it turns out, the CEO was well behind on his numbers and he was actually on track to deliver just $1.3 million in profit on roughly $6 million of revenue. Amazingly, the acquirer was still interested but adjusted down the offer price to reflect 35 per cent less profit than it was promised in the CEO’s forecast.
The seller had already become emotionally attached to the higher offer, was insulted at the last-minute discount and walked away. By that point, other bidders at the table were long gone. The deal died.
What is Mr. Miele’s advice to sellers? “Leave yourself a cushion when doing your forecasts for the year you are planning to sell. The only surprises buyers should have when they dig into your numbers is a pleasant one.”
Tomorrow I’ll ask Mr. Miele which is more important to acquirers: top- or bottom-line growth?
Special to The Globe and Mail
John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable – sellable – company. Follow him on Twitter @JohnWarrillow.