The Associated Press reported that, “Groupon recently enjoyed an impressive market debut….” Fast forward a couple weeks and the Wall Street Journal had a front page article about how far and fast Groupon and other recent IPOs have fallen (including LinkedIn and Pandora Media) and issued a warning about a possible Facebook IPO.
Groupon was shown to be trading at under 60% of its first-day closing price. This is every business buyer, intermediary, banker and other advisors greatest concern. Sellers should also be concerned about overpaying (just like buyers of IPO stocks the first day who have lost over 40% so far).
Overpaying when buying a business creates complications (besides overpaying). The buyer now has to work hard just to grow the company and recoup his or her overpayment and has three other reasons for concern:
Cash flow will be tight because payments are too high and therefore working capital is too low. This can cripple the company’s growth.
This can lead to reevaluating the company, disputes, lawsuits, disruption to operations and added expense. A seller could experience missed payments or a renegotiated deal.
Don’t get caught up in the exuberance of the deal (advisors, watch for this with your clients). Common sense should prevail so it truly is a win-win deal.
“Success is a tricky mistress. It is nice to have but it is a tricky thing to embrace.” Robert Redford