The March 4-10 Puget Sound Business Journal had a front page article on a surge in M&A activity and stated that one driving force was when older shareholders wanted a liquidity event and younger shareholders didn’t have the cash to buy them out and were not willing to take out a bank loan to do so.
The key here is that shareholders were not willing to take out a bank loan. It’s nice when you start a company, put in a little cash and some sweat equity (in this example spread out over six owners). It’s different when your name, personal guarantee, business assets and personal assets are on the line with a bank. It’s at that point that many people, existing shareholders, management or outside buyers, get cold feet.
One year ago a client acquired a company that became available after the seller offered it to the management team. They wanted the business all right; it’s a great company. But pledge collateral, put in some of their savings and make a personal guarantee? No way. They didn’t want it that bad (a no strings attached gift was fine, being on the hook wasn’t).
There are many old clichés. One of which is that it takes money to make money. In acquisitions, it takes risking money to make money. The balance between money at risk and business ownership, or growth by acquisition, can be a precarious balancing point. As mentioned above, for some it’s just too much risk to have much of anything at risk. For others, there’s excitement and the risk is what drives them. This is one reason why seller’s need to get to know a buyer. To make sure that buyer isn’t all talk but is willing to take the risks noted here.