Deb Douglas, Managing Director
Selling a business is a strange blend of art, science, and psychology. The perfect result is the American dream; hard work, courage, and innovation pay off with glittering wealth and glory. However, even the most astute business owner can fumble or miss the brass ring. The following comments are geared toward highlighting a few of the most common misconceptions and mistakes, and sharing proven tricks of the trade which get top results.
Crystal balls don’t work – Business owners assume that they know the most likely buyers for their companies, based on who has inquired about purchase or who is hot in the rumor mill. They also prejudge and exclude prospects, sometimes missing the most wildly aggressive bidders. Experience proves that owners simply do not know. In a constantly changing market, the most aggressive buyer is rarely the obvious. The highest priced proposal we generally receive is usually not the one predicted at the outset.
Filling your dance card – Business owners are reluctant to “shop” their companies. They are uncomfortable making an overt approach to prospective buyers whom they do not know and trust. Fearing the potential impact of rumors, they don’t want many people to know they are considering sale. The most common owner reaction to this fear is the inclination to talk only with a handful of buyers, and those buyers are usually not well-chosen. This approach allows buyers to set lower prices and command tougher terms.
Competitive pressure pays big dividends. As Al Capone was once quoted as saying, “You can get more with a kind word and a gun, than with just a kind word alone.” Competition forces the buyer to put his best foot forward.
No such thing as “Off the Record” – The fortunate buyer who calls at the right time often gets a very open discussion of the owner’s willingness to consider possible sale. The owner assumes that as long as only a few buyers know about the opportunity, confidentiality will be controlled. However, it is often during these early conversations that damage is done. The inexperienced seller doesn’t obtain a signed nondisclosure agreement until he begins to share financial documents. The enthusiastic would-be buyer finishes his conversation with the seller and may walk back into a sales meeting with an excited announcement about a possible acquisition. From there, it’s a short hop to customers and employees.
Conversely, the prudent seller first obtains a signed nondisclosure agreement from prospective buyers, before any serious conversation about possible sale. Rampant rumors about the potential for sale can only harm competitive desirability and can create serious operational problems.
Comparing Apples and Oranges – Every industry has commonly known rules of thumb for pricing of businesses. Sellers often hear that companies in their niche are selling for some standard multiple of pre-tax earnings, and then quickly accept that as gospel for the pricing of their business. However, the application of these rules of thumb can be vastly divergent between one buyer and the next. If the industry rule of thumb pricing is 6-8 times pre-tax earnings, a buyer may pay 8 times earnings for the gross assets of the corporation – leaving the seller to pay off all liabilities of the corporation. Suddenly, the 8 times earnings offer looks more like 3-4 times earnings, on a net basis. Another buyer may offer 6 times earnings for stock – taking all assets and liabilities as part of the deal. Sellers need to be wary of rule of thumb valuation mechanisms.
Value is what competitive buyers will pay in a moving market place. The true market value can be estimated in advance of sale, but only with diligent study of the market place and careful analysis of the individual company circumstances.
Showing your hand – Business owners considering sale will very quickly meet with the question of “asking price”. Professional investment bankers rarely preset pricing. They let the buyer set the price point by competitive bid. Buyers put great pressure on the seller to voice what he would accept for the business. Most novice sellers succumb to that pressure, and throw away the potential for top premiums. Others try to build in enormous leeway by asking for such preposterous amounts that the buyers quickly back away, assuming the seller is ridiculous in his expectations and would be impossible to deal with.
Top pricing is most commonly achieved by letting the buyer set the level. Most offers fall within a fairly predictable range. However, there will be just a few – maybe only one or two – far higher than the pack. The “premium” buyer is found.
If they don’t ask, still tell – Viable buyers control substantial amounts of cash, and make critical decisions for their investor groups. They are likely to be very bright people who ferret out the business risks and eventually ask the right questions. To achieve top pricing, sellers should be absolutely frank and forthright in all discussions with prospective buyers. If a seller discloses weaknesses up front and intelligently, the buyer may well perceive the problem as an opportunity. “If the company is doing this well now, in spite of the problem in their sales staffing, just think how much better performance will be after we correct that problem.” Additionally, the trust level resulting from such honesty makes the remainder of the negotiation infinitely easier and enhances the relationship post-sale.
Consummated deals with truly premium pricing grow from an underpinning of fundamental integrity.
Have I got a deal for you – Buyers are quick to offer the seller a letter of intent to sign. Sellers accept, believing they have a deal. However, a great many of these deals never get to closing – or if they do, it’s at a severely reduced price. The classic letter of intent binds only the seller. The buyer invariably has the right to drop out, if his due diligence is unsatisfactory, at his sole discretion. The seller, in the meantime, is asked to commit to an exclusive process by agreeing that he won’t talk further with alternative buyers. Bad deal. If competitors are chased away, the buyer now has tremendous negotiating power to reduce price or strike tougher terms. The seller is forced to choose between accepting the changes or incurring the time, cost, and risks of beginning the entire process anew.
The solution? Don’t accept a letter of intent until the buyer has truly committed to the deal. Consider a substantial deposit. Work cooperatively with the would-be buyer to find some way to allow him to answer his critical questions and concerns in advance of entering into an exclusive relationship.
In conclusion – selling a business is a strange blend of art, science, and psychology. Handling the process effectively can pay huge dividends. Owners usually only have one chance to get it right, so it’s well worth the time and torment.
Study the elements of value. Build a strong, controlled process for the task. Get competent professional help. Research prospects extensively. Guard confidentiality. Be scrupulously honest and straightforward. Stay calm and steady, and don’t forget to mind the store.
At some point, every business owner gets the chance to cash in on all of that risk and hard work. Never to work again? No – highly unlikely. But never to “have to” is a nice place to be.
