When Gary Cerrone, CEO of CE Consulting Group was looking to sell a commercial HVAC Distributor, it was a true secession planning scenario. The two owners were, at the time in 2020, in their 60s, and felt they needed to understand what their options were.

"There was really no option internally," Cerrone said during the Pittsburgh Smart Business Dealmakers Conference. "We didn't have an employee group that either had the capability of taking the business over or more importantly, had the financial capability of taking the business over."

So, they considered two options. One was private equity. But, he says, the thought was the company likely wouldn't see the valuations that it would be looking for. They instead believed a strategic partner made the most sense.

"And when you're a manufacturer rep, you're obviously limited to where you could sell in your geographical area," he says. "The advantages of going to a strategic partnership, from an acquisition standpoint, would be multiple: One, you may grow your product lines. Some of the lines that my customer had were not really servicing well. They either had issues with distribution or with their technology. This was an opportunity to potentially change that. In addition to the fact that we wanted to look at different ways of expanding the footprint. The company that we ultimately sold to was south and they wanted to expand into the northern regions. So, it worked out well. And then lastly, it would be the fact that you have economies of scale with expense reductions due to redundancies and overhead that you can achieve."

However, there were questions regarding whether it was the best time to sell since it was during the pandemic. While they thought it probably wasn't, he says it's not possible to time the market. All they could do is see if there was a deal that could be made.

"The thing I said to my client mostly was, you will learn from a transaction," he says. "And from that, you'll be able to know when the deal is right."

Cerrone had an exclusivity agreement with the buyer. During the due diligence process, the potential buyer became concerned about what was essentially a supply chain issue. The supply chain fracture facing the company — as well as many others — was extreme. The product that would usually be delivered in four weeks was taking 20 to 25 weeks, and there were multiple substantive price increases.

"The key thing there was definitely to go back to our customers and to recapture those increases along with our customers going to their customers and recapturing," Cerrone says. "Essentially, you put a memorandum book together, you put in projections, and when you don't start to hit those projections, communication is really key. And this is truly an issue where the orders were being delayed, not canceled. So, what was happening is we had a substantive backlog more than my customer had ever seen before. And in essence, when I looked at the potential buyer, I'm like, You should say thank you to us, because we're going to help you fund this deal. Because these orders are just stacking up. But communication was key. And unfortunately, there was a breakdown with buyer number one in our deal."

Because the potential buyers in the deal wasn't following a regular communication cadence, the deal strung out, which caused significant problems.

"Even though when you have an LOI of 75 days, or maybe a little longer, it goes in a heartbeat," Cerrone says. "You start due diligence and you're done. That's how quick. So, we were really in a position where we had fallen outside the exclusivity period and we had to look at other options, potentially, to say, Did we want to move forward with this deal or was there maybe a better option out there?"

So, Cerrone says they went back to their investment banker to reach out to a couple players that were interested but backed out then expressed interest when they again were contacted. One was a much larger HVAC rep with a more powerful base within their product lines. They offered a 10 percent lift in the enterprise value, which he says was key. So, they signed an LOI and did the deal in less than 60 days. But a few days before close, they hit a snag in working capital.

"Working capital was one of the largest discussion items, contentious issues in any deal," he says. "It seems like it's a calculation that everyone understands and it should follow through fairly easily. We were presented with a working capital calculation, and we had to get it done within five days, for a lot of reasons, for the deal. But I can tell you, expert advice with your investment banker, with your accounting group and your legal group, they can lead you through it, because you're just not equipped to deal with technical items like this. You don't have the experience, and you want to leverage advisers to really help you through it."

To get the deal across the finish line with the working capital issue, it took long hours to negotiate an agreeable calculation.

"The buyer and the seller were motivated and getting the deal done and we found a happy common ground and we were able to get it done," he says.

Ane important lesson for those who have never sold a business but are considering the move is that it's likely a once in a lifetime event, Cerrone says, so the company owner or CEO likely isn't equipped to know how to handle it.

"There's a level of sophistication that's required, and the advisers that you pick are important," he says.

In addition to communication being key, owners also should understand that selling a business is a full-time job. Because of that, they should make sure they have somebody within the company that's really driving the acquisition engine, because owners are likely also the revenue generator element, and that has to continue.