The Key Factors in the Successful Sale of a Business
Misaligned thinking and actions at the early stages of considering a sale can account for many acquisition failures. Determination to address the following four issues will have a major influence on achieving a successful outcome. These are:
1. Avoid Passivity at All Costs
This is a selling issue. It is interesting to note that the best acquirers are often not considering an acquisition. Buying a company may not be on their agenda. The only way to find such buyers is through an active search. On the other hand, financial buyers and large publicly traded corporations looking to sustain shareholder values are always on the hunt, yet do not always pay a premium. Passive selling will only ever locate such buyers.
Successfully selling products involves active enquiry generation. Why should selling a business be any different? At Northern Edge, we have developed a vast database of tens of millions of companies. Using this globally unique resource, we actively contact on average between two and three hundred prospective buyers just to locate two to three good ones.
Additionally, a search should not be restricted to the US only. Overseas buyers seeking access to the US market will often buy small to medium-sized companies to facilitate this entry. High premiums may be paid for this type of strategic acquisition.
At Northern Edge, we have a large team dedicated to selling your business and this includes the research and identification of potential buyers. It takes weeks to complete this element of a project. There are no short cuts. Failure to find hundreds of good prospects will almost certainly result in “no sale”. The more companies you approach, the luckier you get! To discover more about these issues download our free booklet.
2. Motives vs. Multiples
If company owners were to ask their accountants to value their business, there is an 85 percent chance that the valuation would be related to the historic profitability of the business. While it might surprise you, the value of a business is driven less by multiples of profit and more so by the motive of the buyer.
Motives for purchasing a company are diverse. It is a fact that the primary reason behind the purchase of companies is the quality of that company’s client base; not short term return on investment. This is the greatest reason why anyone buys a company and the greatest reason why a premium price is ever paid.
The second reason why a company is purchased and a premium price is paid is because of the potential for future growth. If you sell your business, what could the business look like in three years under new ownership, with new clients and fresh investment? These issues have a far greater influence over value than multiples of historic profit. If you negotiate well with a choice of strategically motivated buyers, then you will almost certainly receive a diverse range of bids.
This can be validated with what we at Northern Edge have come to call our “2.5 rule”.
Due to the large number of deals we have completed, Northern Edge has observed hundreds of scenarios and therefore maintains our unique perspective. Over the years, we have noticed that the difference between the lowest and highest bids is consistently 2.5 times. The highest offer is typically 2.5 times more than the lowest offer. We get very few exceptions to this, and it is a great differential between highest and lowest bids.
At Northern Edge, we approach, on average, between 200 and 300 prospective purchasers to sell just one company. It takes us approximately five months to vet and qualify this list down to no more than five or six. This qualified list of prospects will be asked to submit a competitive bid. Bear in mind that we have been negotiating for many months. The prospective buyers have been thoroughly screened. It is at this advanced stage that we consistently find the difference between the highest and lowest bid will be 2.5 times.
If valuation was truly rooted in multiples of adjusted profit, then all bids would be relatively similar. There would never be such a great differential. All buyers would use similar logic, figures and multiples and the bids would be much closer together. To discover more about these issues download our free booklet.
3. Bidder Competition
There is one factor that influences sale-ability more than any other and that is bidder competition. Having a choice of buyers, or “creating a market”, is the single most important issue that a seller can address.
Not only must you find a choice of acquirers, but they must also be strategically motivated and financially strong. It is essential that this matter is not compromised. Therefore, you will have to contact many potential acquirers and this will dramatically influence the sale. Failure to address this will result in a poor deal for you.
Bidder competition influences these critical areas:
THE SPEED OF THE DEAL
With an awareness of competition, an acquirer is less likely to become hung up over issues such as minor warranty problems. BCMS Corporate works closely with M&A attorneys throughout a transaction, and feedback from these lawyers shows that deals with competition have a far greater momentum than a typical sale. If the buyer knows that the seller can walk away and that deadlock is not an enemy but an ally, the deal is less likely to snag. This is more important than most people realize because the more protracted a deal, the disproportionately more likely it is to fail.
THE PRICE ACHIEVED
Of all the factors that will influence price upwardly, the greatest is “creating a market of bidders.” Although this is true in any negotiation, establishing bidder competition remains the most compromised element of most traditional sales.
THE TERMS OF THE DEAL
Several elements of a deal will be influenced by choice. Will you sell for cash or shares? Will you receive 100 percent, 80 percent, or 50 percent cash up front? What about the timing of your exit and the warranties that are demanded? To discover more about these issues download our free booklet.
4. Future Potential
We have already said that the second reason why companies are purchased and why premium prices are paid is potential for future growth. However, if you were to analyze a traditional prospectus, you will find almost no comment on this most crucial of subjects. The truth is that nobody ever buys a company’s history; they only buy its future.
At Northern Edge we produce what we call a “Synergy Business Plan” for all of our clients. This business plan asks the question, “What will this business look like in three years under new ownership?”
When we get down to the exclusive group of serious buyers, we produce a separate plan for each potential acquirer, based on conservative assumptions agreed by both acquirer and vendor. This business plan asks:
- What would the business look like when the new owner brings their clients to your products or services?
- What would the business look like when the new owner applies fresh investment?
- What would the business look like when the new owner brings fresh energy and enthusiasm?
- What would the business look like when the new owner brings synergies, cost savings, ideas, etc?
When you are selling a business, you should not sell what the business looked like last year under your ownership. You should definitely not sell what the business looks like this year under your ownership. Nor should you sell what the business will look like in three years under your ongoing ownership. When you are selling your business, you should sell what the business will look like in three years under new ownership.