Top 5 Tips for Selling a Business?

#4: "Set your sights on the best buyers"


"Understanding who the best buyers are is fundamental to maximising the value of your business", says Shield MD David Young

As a young M&A guy at Goldman Sachs in New York in the mid-eighties, I learned the hard way the crucial importance for anyone selling a business of understanding the likely buyers.

At the Monday morning Valuation Committee I had just proudly presented my team's $300m valuation of a client company to the entire M&A Department when a senior partner, who had been biding his time at the back of the conference room, released a volley of friendly fire, four rockets thundering at me in slow succession:

"You know the value of this bidniss?..... Zee--ro! .....
You know why? ..... No effing buyers!"


In the silence that followed, it occurred to me that you can do all the fancy sector analysis you like of multiples paid by past buyers or current public shareholders, and you can discount future cash flows 'til you're white in the face, but a business is only worth what someone will pay for it.

That's no less true today: if the likely buyers are busy digesting recent acquisitions, merging with each other, or caught by a credit crunch, maybe you ain't got no sale at all, let alone a decent valuation.


When selling a business, competition is king

Having survived that early learning experience, I went on to witness the awesome power of competition to boost prices achieved by sellers of businesses. Competition really can work wonders, especially where there are big potential synergies or strategic value elements available to some buyers.

Only competition forces a buyer off his default position ("How little can I get away with paying for this?"), towards his "indifference point" ("How much can I pay for this and still get a return on my investment?").
So as soon as you've got a business to sell (i.e. one without key person dependence; see our previous Tip #5 -"Be dispensable"), start thinking about who might buy it. Steer for the stars by steering for the synergies.


Scour the planet for the best buyers


Your business may attract trade buyers for all sorts of reasons; allowing them to bulk up their operations and achieve more competitive scale, to capture key customers, to eliminate a competitor, secure a new technology or just share a lot of cost.

Remember: synergy potential with the right buyer can even exceed your stand-alone value. So it's essential to scour the planet for the best buyers, screening all the strong candidates out there, both nationally and internationally.


What are financial buyers looking for?


Your business may also attract financial buyers. They like fast growing, cash generative businesses with highly defensible market positions. Businesses that are scaleable or can be rolled-out on a national or even international basis also find favour.

Private equity funds pursuing leveraged buyouts are unlikely to achieve the same synergy benefits as trade buyers (unless they have already embarked on a buy-and-build strategy) but can add value by funding growth, both organic and by acquisition, as well as by financial engineering. If you have made yourself dispensable (in line with Shield's earlier advice), a financial buyer could back the highly competent team that now runs your business day to day without you, in a management buy-out (MBO).

Alternatively, a private equity fund could allow you to "take some cash off the table" immediately by selling a stake now, while retaining a management role and a stake in the business, enabling you to benefit from its future growth as well.

Although financial buyers shy away from company sale processes involving more than a few of them, they accept that they have to compete with trade buyers. So if your business is (or can be made) attractive to both trade and financial buyers, you are in a great position to benefit from the enhanced competition that results. If flotation is an option, all the better; a parallel process can add that horse to the race as well, allowing the sellers to select the best option at a late stage.   


What doesn't a buyer want?


Knowing what buyers won't want can be important too. A small secondary side to your business might be off-putting to a buyer - especially a foreign one who would prefer not to have acquisition integration complicated by staff-cuts and restructuring in an unfamiliar jurisdiction. You might be much better off getting a high multiple for 80% of your profits in the sale of a "pure-play" business, than getting a much lower, blended multiple for 100% of your profits, 20% of which come from a secondary side which the strongest buyers won't want.

So our advice is to use whatever time you have in advance of a company sale to develop your business in the light of the needs and desires of the likely buyers.

Put all this together and, when the time is right, you'll have plenty of those "effing buyers" wanting to crash your party!

© 2008 Shield Corporate Finance

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