Joe was a franchise print shop owner for 12 years before selling out of desperation. He compounded his problem by using the Ouija board approach to choosing a buyer (last month’s article), and now he chooses the wrong way to sell along with making a couple of other bad decisions. Hopefully, we can learn something from his misfortune. Here are a few examples of what went wrong.
To start with, Joe sold the new owner stock in his closely held corporation instead of entering into a “bulk” or “asset” sale. So what? Well, the biggest problem with a stock sale usually falls to the buyer. Like what? Oh, any tax liability or environmental issue can be passed through to the buyer, whether they know about it or not, so regardless of how much due diligence one does, there’s always the unknown.
That’s why most buyers want to protect themselves through a “bulk” or “asset” sale where the seller sells the producing assets of the business. In short, the old business ceases and a new business begins and no unknown liabilities pass through. That’s the up side.
The downside is that workers are sometimes surprised when they find out their employment ends with the old company and they have to apply and begin their service over again with the new one. Any accrued vacation, pay, or benefits are owed by the old company and the new company’s policies now govern.
Another thing is that the old company keeps all of the working capital (current assets and current liabilities) and settles its accounts. It still collects the receivables and pays the payables and taxes owed as of the transaction date. Often this is done seamlessly, with the buyer and seller cooperating by sorting out who gets what during the first few months after the transaction. Regardless of how it’s done, the new company starts, well, anew. OK, with that background, let’s pick up with old Joe and his story.
Bases Not Covered
Joe figured the buyer had enough cash because he had the same as Joe did when he started. That was a bad call because the amount of cash needed depends on what the business needs now.
Joe also agreed to finance the buyer. He figured it couldn’t go wrong with the franchise’s help. Well, what went wrong was Joe focused on the buyer’s personal attributes: the buyer was smart, so he was golden. Joe failed to realize he was entering into a financial deal. What collateral did he get? None is the answer.
Joe was even warned when the buyer said things like, “I need to protect myself,” and “I’m bullet-proof.”
If you are going to finance, get some collateral. Joe didn’t because he was too desperate to sell.
The Fallout Begins
At the first attempt at closing, the buyer reneged because the receivables were too low and he didn’t want to count anything over 90 days. It was the first time Joe had heard about that. It ended badly, as Joe said he “pulled a nutty” and left. Remember, though, Joe was desperate, so he came back around and agreed during a second closing.
I hate to say Joe was incompetent, but here are a couple other items. The buyer refused to use his house as collateral and didn’t provide anything else. Believe it or not, the buyer never came into the business to see how it ran. He never asked questions about operations. And he never talked to Joe about the business.
Well, after the closing finally happened, Joe worked there for a month. Joe said the buyer still never asked him anything about the business. Instead, the buyer had a plan to change things, and did—new furniture, computers, and filing systems.
Within two weeks of Joe finishing his month, the biggest customer left. The new owner said he was in control of their artwork so the customer wouldn’t leave. He was wrong.
Here’s another beaut: Joe agreed that the buyer could make offsets to the agreement, but there was no discussion as to what. The buyer just paid one month and then declined to pay the others because of “offsets.”