They Appeared to be the Perfect Buyer

portrait of sara burdenSara Burden is the owner of Walden Businesses based in Atlanta, Georgia. Sara has over 30 years’ experience and selling companies with sophisticated high profiles in the services, heavy manufacturing, and distribution sectors.  Prior to joining Walden, Sara was a successful entrepreneur as the founder of a permanent staffing service specializing in high-end administrative support personnel. In 1984, her acquisition of a temporary services provider expanded her firm to one of the largest in Atlanta. The temporary division was divested in 1988, and the permanent division in 1991.  She has served on the Executive Board of the Atlanta chapter of the National Association of Women Business Owners and is a member of the M&A Source.

Deal from Hell Fact Pattern 

Industry: Steel Fabricator Size by Revenue: $25,000,000

Price/Terms: $11,000,000 purchase price due at closing

Problematic Characteristics: The initial buyer contracted with misrepresented their intentions right up until a few days prior to closing.

What Happened? 

We received a full-price offer for $12 million offer from a buyer in the DC area who identified himself as a member of a private equity group. The deal was structured as $6 million cash at closing and $2 million in bi-monthly payments, ending six months past the closing date. There were some other add-ons but nothing significant.

This was our first offer and they appeared to be the perfect buyer. However, it turned out to be a sophisticated con job. Besides us and the owner, this buyer hoodwinked the attorneys on both sides and the young consulting firm from Raleigh, NC that performed his due diligence.

Three days prior to closing, the consultants arranged for a representative from the buyer’s bank to visit the company without prior knowledge to me. We assumed the bank wanted to see the facility, meet the owners, and acknowledge that they were about to invest in a real business. Following the bank visit, I received a call from one of the owners saying she did not understand why they visited as all the bank did was review the accounts receivable. I became alarmed and suspected something was amiss.  After a call with the consulting group, I learned that the buyer intended to factor the $8.5 million in receivables to cover the cash down and then pay the remaining $6 million from cash flow. This would have quickly boot–strapped the company.

How Was It Resolved? 

I advised my clients that we needed to shut the deal down immediately. They agreed and paid the legal fees, plus accountants’ charges, etc., and went back to business as usual.

What Was the Takeaway? 

Listen to your gut. If something seems too good to be true, it probably is.  If something feels a little “off”, probe until you either satisfy yourself that everything is okay or back away. As Larry Stevens says: “go ugly early.” Be direct with your clients.