You know me by now. I’ve closed a ton of deals, big and small.
Deals for large corporations. Deals with partners. Deals on my own.
I’ve read lots of messages recently about how COVID is stopping deals being closed.
Total, utter BS!
I’m closing deals. You guys are closing deals.
We are in the biggest buyers’ market I’ve seen over my 29 years in this business… and it’s going to continue.
So today I want to talk to you about a deal I closed in November 2020 through PROX Capital Group, the private equity firm I own with my business partner Adam Markley.
The deal was in the U.K. Since PROX is based in the U.S. and I’m stuck in the U.K. unable to travel, I was on point for getting this deal over the line.
In all the deals I’ve ever closed, success or failure typically boils down to ONE thing — thought that ONE thing changes from deal to deal.
It can be the financing. It can be legal aspects. It can be financial due diligence. It can be business’s performance during the closing process…
But more often than not, the ONE thing that gets the deal over the finish line is the relationship you build with the seller.
That’s exactly what happened in this deal.
Let me tell you about this business. It’s called BHMA Limited. It’s a business that provides signage and displays for multiple sectors including hospitality, education and retail.
It was a retirement sale— the motivated husband and wife owners who started the business in the 1990s were ready to move on and enjoy the fruits of their labor.
They did little to no outbound marketing and had no sales team. They relied purely on word-of-mouth referrals and a lot of repeat customers.
Their customer service is the key unique selling proposition (USP) in this business.
I got involved in the deal once the terms had been agreed to. It was PROX Partner member Abdel that found the deal, negotiated the terms and raised the financing.
The business is VERY profitable and had grown substantially in 2020.
How was that possible? The U.K. mandated lots of COVID-19 signage and displays to encourage social distancing, mask wearing, hand washing, etc., and the business benefitted from that protocol.
These were the last fiscal year’s numbers (to April 2020):
Revenue = £1,557,349
EBITDA = £244,848
Here are the latest numbers, including the full year forecast to April 2021:
Revenue = £2,024,554
EBITDA = £526,384
The average profit over those two years is £385,616. We paid £657K for the business.
That’s a 1.7X multiple, though it was easily worth a 3X multiple. We acquired the business at a discount — not bad.
We paid £500K at closing with £157K in seller financing over three years.
The closing payment came from a cash flow lend as there were almost no assets to leverage…
The real estate was leased. The business had (at most) £30K in receivables. And though inventory sat at roughly £200K, it was so fast moving (sourced mainly from U.K. suppliers) that a revolving inventory facility wouldn’t have worked.
But a cash flow lender LOVED the cash flows and agreed to lend the full £500K.
All the numbers checked out. The issue was timing.
Though COVID hasn’t prevented deals from happening, in many cases it HAS delayed closing timeframes.
Lenders, CPAs, lawyers, etc. are mostly working from home, and it’s fair to say the typical deal efficiencies are not there. What used to take 60 days is now taking 90-120 days.
We had an original deadline of mid-October to close the deal — part of our exclusivity clause in the LOI. But the seller grew increasingly unhappy as it became apparent we were going to overshoot the deadline by about a month.
You see, they had agreed to terms at a much higher valuation with another buyer earlier in 2020. But the buyer pulled out just as the U.K. went into its first national lockdown in March as a result of the pandemic.
That deal aborted just a few days prior to the expected closing date.
The sellers were devastated. The deal was there, ready to close. The money was in escrow… waiting.
But the buyer got nervous and pulled the plug. What a fool!
The buyer missed out on all that COVID-related growth, figuring the pandemic would negatively impact ALL businesses. They didn’t think that COVID would actually help the business GROW — almost doubling its profit within a year!
Their loss was our gain. (And it helped us negotiate the lower valuation.)
You can imagine the sellers’ psychology at this point. We promised a mid-October closing and then requested a one-month extension.
The sellers were actually really angry — so much so that their lawyer became super aggressive and totally unhelpful.
I was concerned that the business was still growing and they’d want to renegotiate terms. Once you are in the closing process with financiers in tow, you have to lock down the terms. You can’t increase them unless the seller is willing to accept an earn-outs.
Plus, the husband had a lot of other things going on too. He was about to move residences and undergo minor surgery. This was all impacting his mindset.
My secret weapon was the relationship I’d built with him in particular. We had become firm friends. We had shared interests in performance cars, red wine, Australia, grandkids and lots of other passions.
These all became critical as the deal got delayed.
Because he knew, liked and trusted me, I was able to convince him this was NOT going to be a repeat of the aborted deal from earlier in the year.
I reinforced WHY we wanted to buy his business and reassured him of our commitment to it.
I also reminded him that – though not ideal – every week the deal was delayed made him more money. Any cash the business accrued over and above what he agreed to leave behind for us was his to pocket.
This helped to calm his nerves and we got the deal closed, even with a last-minute snafu on the financing (the funds were temporarily lost in transit – eek!)
So, the ONE thing in this deal was the strength of my relationship.
I leveraged that and we got there in the end.
Look for more to come in our “Deals From the Vault” series. After all, ALL deals have lessons.
Until next time, bye for now.
