How three offers came in with a $10 million swing
Beauty is in the eye of the beholder. And when it comes to selling your business, value is in the eye of the buyer.
Lower-to-mid-size businesses typically go to market without a preset asking price. You will set an internal benchmark with your M&A advisors, but we won’t publish or discuss your value expectations with potential buyers.
Different buyers see different value in your business. So publishing an asking price is like setting a ceiling on what your business is worth. Case in point:
We’re representing a business that recently received four indications of interest (IOIs). An IOI is the earliest stage of the acquisition process in which would-be buyers submit their target acquisition price and general conditions for completing a deal. At this point, buyers have read a thorough prospectus on your company, but they haven’t visited your business site or done any significant due diligence.
After we vetted the original round of IOIs, we set up conference calls with the owner and potential buyers. At that stage, one of our buyers dropped out. While the acquisition made sense synergistically, it looked like culture issues could be an obstacle.
The other three buyers moved on and submitted letters of intent (LOIs). An LOI is a more formal offer, including a firm acquisition price and deal structure. Two of these offers came in near the $10 million mark while the third came in closer to $20 million.
Three different buyers saw the exact same information, so why did one offer come in so much higher? In most cases, it comes down to motivation, synergies, and the buyer’s growth strategy.
Sometimes, a buyer sees significant cost savings by rolling your business into theirs. If they can add your revenue without adding all your costs, your business will be worth more to them than a buyer without those same advantages.
Other times, buyers are motivated to grow. They may have excess capital sitting on the balance sheet and buying a business will provide better returns. Or they may be a mid-size player in a consolidating market who knows they either need to eat or be eaten.
Maybe you have solid market share in the buyer’s next growth target, you have a lock on a coveted blue-chip customer, the buyer can better increase sales or reduce your cost of doing business, etc., etc.
At the end of the day, value is relative. When selling, you want buyers to determine how much value your business has to them. The buyer who will pay the most is the one who can leverage your business to the greatest advantage.
To get the best price, you need a structured sale process that brings all logical, qualified buyers to the table at the same time. That’s how you get the market to truly set your value.
Read MoreFive Important Steps to Consider When Selling a Business
Selling a business can be a daunting and time-consuming task, particularly when planning has not occurred ahead of time as part of an exit strategy. When deciding to sell your business, some critical steps should be taken that can help to ensure the deal will go smoothly and that a strong value is obtained for the company. Often owners are not prepared until the time they are ready to sell and as a result will rush through some important steps that could end up costing time and money. Planning for the sale early on, even years before the owner is ready is a good practice and will prove valuable when the time comes to sell the business.
To maximize the value of the company it is important to begin as soon as possible, regardless of whether you are ready to sell or not. While there are many facets to the sale of a business below are five important things to consider: (more…)
Read MoreWhere to Start After Purchasing a New Business
When buying a new business, a lot of time and effort is spent searching for the right fit. Once the decision is made to pursue the deal there is even more work to do during the due diligence process. Finally, if the deal makes it all the way through to closing, it is now time to begin to run the company. To ensure an efficient transition and take over, there are some key steps that a new business owner should take. A common solution for this transition period is the creation of a strategic plan, often referred to as the 90-Day Business Plan.
Often a new business owner will have developed plans for change during the due diligence process and will be eager to dive in and implement changes immediately. However, to ensure a smooth transition, it is important to stay patient and spend time understanding as much as possible before applying a lot of changes that could disrupt the daily operations of the business and potentially create even more discomfort with the employees.
Upon taking over the new company, it is imperative to have a strategy in place with short- and long-term goals that can be accurately measured and carried out to completion. This 90-day plan is often broken down into 30-day sections to what is called a 30-60-90 Day Business plan. The first 30 days would include more introductory type tasks such as announcing the new ownership, and meeting with employees. This is also the time to gain a deeper understanding of the knowledge base of employees, systems, operations, clients and vendors. This time should be spent learning and documenting as much as possible about each area to develop a concise strategy for the coming months. The next 30 days could include a deeper dive into some areas where it has been determined certain changes would benefit the organization through knowledge previously gained. To aid in the execution of changes a list of short-term goals should be created for immediate improvements on some of the low hanging fruit. By the end of the 90 days, some key improvements can be implemented as well as the fostering of a new culture and a more long-term strategy for the business. Some key areas which should be addressed during the 90 Day process include: (more…)
Read MoreThe Importance of Selecting the Right Buyer When Selling a Business
When a seller decides to list a business, they are hoping to attract a lot of interest. If this occurs, the question will then be how to determine the best buyer from the pack. After going through the valuation process with a reputable source, the owner should have a clear idea of the company’s worth. Buyers may be willing to pay more or less than the valuation depending on what they are seeking. Finding the perfect match could lead to a larger sale price, more agreeable terms, and usually a quicker closing. For this reason, finding the right buyer is critical and should be a defined process from the outset.
Strategic Vs. Financial Buyers
Buyers come from a variety of places and generally consist of two types; financial and strategic. A financial buyer is usually more of an investor than an operator and tends to be focused on using investor capital and debt to fund the purchase. Similar to flipping a home, the goal of the financial buyer would be to get in as low as possible and then sell it after 5 to 10 years hoping to increase the value along the way. It is common that financial buyers will structure part of the consideration as a seller note. This will help to ensure the previous owner will keep an interest in the company’s success and potentially add to future growth.
A strategic buyer is a bit different in that they usually are larger competitors in the same or similar industry looking to improve on their existing business. Strategic buyers are looking specifically for synergies where they believe they can either increase profitability with added volume or add to their offering with a similar or related product or service. Whatever the tactic, the strategic buyer may determine a much higher (more…)
Read MoreCommon Deal Structures When Selling a Business
The value of a business can be determined in a variety of ways and requires a thorough understanding not only of the actual business but also of the industry, competitors, as well as the current market. Like in residential real estate, in a buyers’ market there will be less competition for the buyer of a business which can drive down the multiple and overall sales price. On the other hand, in a sellers’ market owners may be able to increase the selling price. In addition, there are many other factors specific to each business that can impact price and demand. Regardless of the market, along with ensuring the business will go into the most capable hands, business owners will also want to attract a buyer who is willing to pay a fair asking price for their company. Unlike a real estate transaction, there are many creative ways to structure the sale of a business that can be achieved through a variety of solutions. A few of the more common structures include All Cash Deals, Seller Financing or Earn-outs.
All Cash Deals
An All Cash Deal is the most straight forward and the least risky to the seller. An all cash deal is where the total purchase price is paid to the seller upon the closing of the deal and nothing else is owed by the buyer. These types of deals can often occur when a larger company acquires a competitor and has the resources to pay the entire purchase price. All cash deals are more likely if the business in bankable. However, there are also cases where a seller may accept a lesser amount for an all cash deal since it is often the least complicated structure and allows the seller to walk away at the end without much further obligation. Because of reduced risk an all cash deal can be attractive to a seller and the simplicity of the deal may off set a reduced price given the alternative of a more drawn out structure that may include additional financing or delayed payment.
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