For every industry in the US today, where companies are operating at a profit, there will be opportunities for sale at magnificent success pricing, probably for at least five years. We are talking here, when we say “magnificent success pricing” of the home run in business sales. We are talking of the “grand slam” home run to truly cap an entrepreneur’s lifetime of hard work with the ultimate reward.
Our firm has generated quite a number of such “home run” sales of companies over the past 26 years. We have also seen several commonalities to these “home runs.” Several of the most critical points to such success are as follows:
Creating Intense Competition among Buyers-
Every buyer has a responsibility to purchase a targeted company at the lowest possible purchase price. Even in those wonderful situations where, due to synergies between the two businesses, it is truly a 1+1=3 combination, the “extra” 1 doesn’t automatically get paid to the seller. The buyer will only stretch to maximum potential in pricing, if he “must” stretch, in order to win the deal.
Let us provide some real-life true examples of how this works:
Several years ago, a prospective client came to us with an offer in hand to buy his company for $10 million. The owner had a feeling the price was too low, but wasn’t sure what his company was worth. The company was growing tremendously, was extremely well run, and was in a niche that we knew many buyers would be excited about. Upon accepting the engagement, we made it clear to the buyer that we were also talking to alternative suitors. In less than 30 days, the original buyer increased his proposal from $10 million to $25 million in cash at closing, plus another $15 million if certain prospective targets were met. The seller closed the deal about 60 days later, and has since gotten every dime of the additional $15 million.
Our firm sold a consumer product company which was headed for about a $12 million sales year, and was profitable at almost 1/3 of sales. The company was growing rapidly, and for its last completed year had only about $7 million in sales. We received 18 offers to buy the company, most at a $15-20 million purchase price level. (This equated to a pretax earnings purchase multiple of 5.5-6.5, on HISTORICAL earnings – but gave little heed to the tremendous growth in process.) We received 2 offers well north of $30 million – one at $32 million from a private equity firm with some related industry holdings, and one at $35 million from a strategic industry player. (Only these most competitive buyers were willing to pay a sensible price on current trends and immediate short-term prognosis.) The equity fund buyer was flexible on owner transition terms, was committed to a very fast closing timeline, and was generally positive and good to deal with, boding well for the future of the seller’s long term employees and the company he had built. Our client accepted their $32 million offer.
Finding Indirect or “Adjacent” Buyers-
Creating intense competition is a function of managing an effective selling process, but there’s more to it. It’s exploring every possible, creative, 360-degree prospective buyer that may be related – even tangentially, to the selling company’s business. Many of the sellers we talk to begin with an assumption that they probably “know” the best likely buyers. Most commonly they are thinking of those who are their fiercest competitors, who they know would be delighted to eliminate the competition. In 80% or more of these cases, the early identified “best” buyers prove NOT to be the best.
The best buyers in many cases are the players who are in an adjacent business space. They may be companies which serve the same customer base, but with very different products. They may be companies who have similar products, but have focused to date on a very different customer clientele – and who thus benefit from entrance to a new customer group.
We sold a general contractor which provided internal building and equipment design and build-out to material handling customers, like major warehousers and delivery services companies. Our client bid virtually every project each year (no “automatic” recurring business) and they were dependent upon major capital projects for utility of their services – both of which tended to reduce pricing in the minds of most buyers. However, our client had a very major project just under contract with an extremely desirable customer – Federal Express. The company was about $30 million in sales, and was profitable (pretax) in the high teens as a percentage of sales. The new Federal Express contract was for $60 million of work, to be done over a several year time-frame. We had probably in excess of 25 offers for this seller, all at the $30-$35 million price point.
Fortunately, we were tenacious enough to keep looking for more and better buyers. At last we got some background information on what else Federal Express bought extensively as they built new facilities. For example, we learned that they spent vast amounts on sorting equipment, and on conveyor belting for use in these facilities. We targeted those slightly different types of manufacturers, who we hoped might get excited about the access to Federal Express. In one week, we got 3 offers in excess of $50 million. We closed that deal about 2 months later for $67 million – all cash! (The premium buyers were found!)
Capitalizing on the Great “Moment” of Desire-
Every business owner is approached frequently, by would-be buyers probing sale. If the owner courted each and every such prospect, it would be the ONLY thing he does in his business. In 19 of 20 of such approaches are intermediaries trolling for new work, or are bargain-hunter “strategic buyers” – who look constantly and tirelessly for bargain deals in the marketplace.
However, sometimes, the buyer is real, has money, and is serious in intent. Owners need to remain alert and be ready to capitalize on the rare and golden opportunity that will someday come along. When you sense that you have a real and enthusiastic suitor, who is likely to pay the premium – get help. Professional intermediaries will in virtually every case justify their fees in significantly increased pricing.
Our firm performed consulting services for one of the nation’s largest unemployment service companies, for several years. This company was approached a couple of times every year by well-heeled and very substantial providers of other services to the Fortune 500. Our client had relationships with about half of the Fortune 500, with the unemployment consulting services they provided.
We entertained proposals from several of these suitors over the years – but our client’s mind-set as to “price” was extremely high, so most we ended up passing on. Finally, a few years ago, our client was approached by a slightly small, but very well capitalized publicly held suitor, with a substantial war chest for just such an acquisition. Our client at the time was slightly over $30 million in sales. They hired us to help in negotiations. We sold the company to the public suitor for $80 million – all cash! On the same day, the that buyer also purchased our largest unemployment-consulting competitor – which was larger than our client, and more profitable. The competitor got $40 million, on the same day that we got $80 million for sale – so their investment in professional help paid off!
Over the years our firm had probably been paid about $100,000 per year for services to consult and consider proposals by this client. The $80 million they got for that sale made their expense to review alternatives show as a pretty prudent move. Our client would tell you that they never would have achieved that superb pricing without our help. They capitalized on the moment – like true premium professional management! (By the way, that client was 100% owned by an ESOP. Happy day for a lot of long-term, hard-working employees – who built that great company!)
We sold a limestone kiln operation to a steel-manufacturing supplier who had approached them several times over the past few years. Our client attempted to accept the offers proposed (more than once), but every time, something went amiss, and they didn’t get closed. They hired our firm, and the competition we generated really nurtured velocity for the transaction. We ended in sale to the steel supplier who had approached several times before. (If we hadn’t closed with them – we would have closed with one of 3 or 4 alternative suitors, who were making fast progress.) Again, the foresight to capitalize professionally on the strong marketplace paid off!
Every business sale doesn’t result in the home run of a lifetime. (Our “home run” success rate has been, over time, on about 1 in 4 of the sales we handle.) However, the prudent and opportunistic business owner, who remains alert to his marketplace, CAN create a lifetime of financial security – a fitting reward for the risk and hard work that owners endure!
