Most Common Mistake Made By Sellers (download pdf)
“Selling to the Unsolicited Buyer”
If someone contacts me, indicating an interest in buying my company, and I am willing to entertain an offer, why shouldn’t I? That seems like a reasonable response, right?
The following describes why this approach to exiting a company is almost always detrimental to sellers, and particularly to those who are seeking to receive the best value and terms for the sale of their businesses.
While you can obtain a valuation on your company, this may only be a general barometer as to its value and not indicative of the value to a strategic suitor. In selling a private company the market will determine its value, if handled appropriately. This is done by soliciting bids from multiple parties in a competitive sale process, that can only be done effectively by conducting extensive research to identify those potential buyers, who for various reasons, find the business to be a valuable strategic fit with its own operations and, are willing to offer premium prices to secure a deal.
This is a time consuming process, which is one of the reasons many owners opt for the “one-off” offer, not realizing that they may be conceding significant value. Compare the “one-off” sale to that of a private equity fund selling a portfolio company. In most every case the private equity fund managers will engage an investment banking firm to auction off the portfolio company being sold. They do this because they i) want to achieve the highest possible returns and ii) they have a fiduciary responsibility to their investors to try and maximize the value of their investment. Why then wouldn’t a private business owner do the same? Only by identifying and methodically marketing the company to a targeted list of potential suitors can one hope to achieve the best results.
What then, are the benefits of formally marketing my company to a targeted list of potential suitors?
- It communicates to potential suitors that there is a formal competitive sales process. This will help to identify and eliminate any parties seeking to buy at low values and will focus attention on those serious contenders having the resources to consummate a transaction. For example, a buyer in a non-competitive process will almost always make its initial offer considerably less than what it may otherwise be willing to offer. Wouldn’t you offer a lower value if you thought you could get it for less? A cheaper purchase means higher returns and don’t assume that they have your best interest in mind. This is, after all, a negotiation and the deltas between offers can be significant. We have seen values differ over 50%. By receiving competitive bids it provides an opportunity to compare proposed values, transaction structures, deal terms, and how the value will be delivered, which provides the seller with knowledge and leverage in negotiating the best possible deal terms. For instance, are their seller notes, earn outs, is it a stock or asset purchase, management agreements, etc?
- Aside from the general proposal terms, there is also the opportunity to evaluate ancillary “fits” with each of the buyers such as compatibility, future intentions for the business and for the employees.
- While you will never fully understand how the business is being evaluated by each potential buyer, you will learn through the process how each are viewing the business as fitting strategically into its current operations, which will help provide additional insight as to its importance. This insight will provide more direction as to how much negotiating leverage there may be.
- While many owners seeking to sell a business may have very definitive ideas as to what they hope to accomplish, the exposure to multiple buyers provides the opportunity to explore options they may not have otherwise considered. For instance, owners who originally wanted to sell 100% and not work for anyone else, may find that they are intrigued by the prospects of selling to a private equity group and receiving some liquidity to secure their future, while maintaining an equity interest in the business and obtaining a financial partner who can provide the resources and support to expand the business exponentially beyond what the seller could, or is willing to do on their own. Even in selling to a strategic buyer, where the seller had not contemplated an on-going role, the seller may find that a strategic role is offered that they find compelling, re-energizing their entrepreneurial spirit.
Preparation of Business and Providing Sanitized Information on the Company
While preparing a business for sale provides distinctive benefits, which we discussed more completely in a previous newsletter http://towindward.com/improving-values-and-appeal-of-businesses there is also the issue of the quality of the information which gets provided to the “one-off” buyer. As part of the exercise in formally preparing a company for sale detailed information on every facet of the business is collected and assimilated into a formal memorandum. The information is scrutinized for accuracy but also sanitized to present the company as it may appear if not privately-owned. Adjustments are made to earnings for items such as , excess owner’s expenses and compensation, accounting practices for reducing taxes which may depress earnings and thus, value, above market rent rates for owner owned real estate, etc..
Once information has been shared with the “one-off” buyer it becomes very difficult to reverse how it should have been presented and perceived if having been subjected to a thorough review first.
Conclusion
If you are solicited by the “one-off” buyer and are inclined to entertain an offer, there is a way to do so while ensuring that your best interest is still represented. That is to consider engaging in a formal sales process and having your investment banker contact the “one-off” buyer of your intent, and having it provide the buyer with an opportunity to make a pre-emptive offer. A pre-emptive offer will provide them with an opportunity, prior to the full process beginning, to put forth a proposal that you would deem exceptional. The investment banker would still pull together the information on the company and assimilate it a memorandum for dissemination and ready for distribution to a broader audience, and the threat of an auction process will maintain leverage for seller. By approaching the “one-off” buyer in this manner, you can ascertain just how serious they may be.
Windward Advisors, LLC is a sell-side, buy-side, capital raise, and corporate growth advisory firm. Windward specializes in helping business owners better prepare their businesses, with the intention of increasing shareholder value by providing strategic planning and corporate growth advisory services, and by representing owners in the execution of sales, acquisitions, and financial structuring transactions. Windward is an advocate of ensuring that business owners are knowledgeable about their alternatives and we work closely with other trusted advisors to assist owners with properly preparing before pursuing transactions.
If you are interested in learning more, please contact us for a no cost and no obligation consultation.
Steve Howell showell@towindward.com or Barry Johnson bjohnson@towindward.com
Managing Directors
(804) 784-7191