Dealmaking can often force you to make difficult decisions. Kenneth B. Liffman falls back on a saying from his mother when he encounters tough trade winds on the M&A landscape.
“As my mother told me a long time ago, ‘Don’t fall in love with anything that doesn’t love you back,’” says Liffman, chairman and president at McCarthy, Lebit, Crystal & Liffman Co. “One of the toughest things is to decide when a deal is not worth doing, when it’s hurting too much, when it keeps kicking you.”
Liffman joined the firm in 1979 and served as managing principal from 1993 through December 2017. He’s spent a lot of time shepherding clients through the process of negotiating transactions.
In this week’s Dealmakers Live, we spoke with Liffman about the difficulties that often arise when you’re looking to sell your business and three critical questions that can help inform your decision. What follows is a transcript of the above video, edited for readability.
The complexity of selling your business
People often ask me, 'What do I do if I want to sell my business down the road? What do I do now if I want to get the best price for the business and have the best chance to achieve my goals?' The answer is extremely difficult. The principles that made your company successful, it was watching cash flow. It was not necessarily going for top line, meaning gross, but going for net income. We have folks who do $75 million to $100 million a year in sales and barely break even. And we have folks who do $20 million in sales and make $3 million or $4 million a year. It’s how you choose to run your business.
The problem with skinnying down your business, which is generally the right way to get ready to sell your business. What do I mean by that? If you weren’t already doing this, if you know the people in your industry are going to be looking for top line [income], you start to go out and reach for sales that you wouldn’t normally have gone for that may have a higher chance of creating an account receivable that won’t get paid. You do things that you may not have been doing before. I have a client right now that refuses to do that, even though he knows it would maximize the sale. He just has too much pride.
And I don’t disagree with him. He just has too much pride in the way he runs his business. It is in the construction business. It’s in the concrete business and he builds a lot of big projects. He can go after a project that he knows he can nail and do really well, but it doesn’t bring in as much revenue, but it leaves him more money on the bottom line. Or if he is going to try to sell his business to a company that is rolling up concrete businesses, then he would need to pump his revenue so he looks bigger than he is. But if while he is pumping his revenue, he runs into a bad project because he didn’t follow his business principles and that creates a $2 million loss, he’s lost on both ends.
So the answer to the question is extremely difficult and not necessarily generic in terms of its answer. It depends on the business.
Three critical questions
Sometimes, you have to make a very tough decision. As my mother told me a long time ago, ‘Don’t fall in love with anything that doesn’t love you back.’ One of the toughest things is to decide when a deal is not worth doing, when it’s hurting too much, when it keeps kicking you. Every deal is going to have its ebb and flow and be tough. But if it keeps kicking you, if bad things keep happening even though you’re doing your very best. It might be telling you there is no way to get the rate of return that you think you’re going to get. You should not be disrupting your family life over this.
Whatever the issue is, you have to decide. The easiest way to look at a deal or pretty much any decision is what do you really need to make this happen? That’s No. 1. If you don’t get that, get out of Dodge. No. 2, what would you like to have? That’s pretty cool. If you get that, so much the better. And No. 3, what do you have to give up to get one and two? If you break it down like that, pretty much any decision becomes a little bit easier. The problem usually happens when folks can’t put those into the three silos.
I beat on them, in my own sweet way, to try to make sure they fully understand. If they do, under the rules of professional responsibility, I have to make a decision there. I either go with the flow and try to achieve everything they want to achieve. Or I say, ‘You know what, maybe you ought to move on down the road.’