The Letter of Intent (“LOI”) set the price at $22,000,000. The Asset Purchase Agreement, known as the “APA”, executed just six weeks later set the price at $21,750,000. At closing, the purchaser wound up paying $20,200,000. The sole reason for this 10%, two million dollar haircut was the seller’s lack of inventory control.
Particularly in a tight economy, due diligence is the order of the day. Savvy purchasers will look for audited financials and recently documented full, physical inventories before coming to the settlement table. In that same vein, savvy sellers will address this issue well before even putting their company on the block. The price of overlooking inventory controls is steep.
If the Buyer ever gets to the point of knowing more about the company than the Seller, the Seller will take a hit.
Too many companies, particularly family owned companies, try to sell the business while relying on the strategies and procedures which served them well over the years while building the company. They don’t work. A successful sale depends upon the seller’s ability to view the company through the eyes of the buyer. Most notably, this includes absolute verification of inventory.
So, before seeing their lawyer, business broker or investment banker, sellers hoping to realize full value at closing, would be best advised to take a stroll back to the warehouse…and stay there for a while.