Considering selling a business during the recession? Market testing reduces the risk


Why not test the market to find out what value you could achieve, without committing yourself to a sale.


cockpit'If we compare running a business to flying a plane, market testing is like going in for a landing through the clouds, taking a look at the terrain when it comes into view, but being prepared to pull up again if the conditions are unacceptable', says Shield's David Young.

Maybe you have been flying your business for a while, hoping to land a sale this year or next. But the economic storm that has engulfed so many parts of the world is severely restricting visibility. In the prevailing conditions, it's very hard to see where the value in a business lies. And making a safe landing with poor visibility is risky. But continuing through storm clouds is risky too; the turbulence may destroy us and not all of us can keep going indefinitely. We may run out of fuel (money, debt or equity) or time (due to illness or retirement). And things may get a lot worse before they get better.
So difficult decisions are being made. Owners and managers are weighing up their chances; flying on, or going in for a landing. And it's a fateful choice, either way. We all know that a failed sale is extremely dangerous and possibly fatal for a business:
  • The continuing uncertainty that hangs over the future of the business can kill the confidence of your staff and your customers, and attract competitors to move in on both.
  • The sheer time and effort absorbed by any kind of business sale process distracts management's attention from their day job of running the company and often leaves them exhausted. 
  • If the sale fails, they'll be demoralised as well.
Yet keeping going may not pay off either; worsening recession pressures lie ahead and most worrying of all is that nobody knows how bad it will get this time. Unprecedented government initiatives in the wake of almost unprecedented financial sector insolvencies may not succeed in averting further turmoil. Battling on may be futile and drain us of whatever remaining reserves we have.

These are without doubt the toughest conditions for potential sellers of businesses we have witnessed in 25 years in the M&A market.

So here's an idea, born out of bitter experience, but helpful to those who embrace the reality it reflects.

Why not test the market to find out what value you could achieve, without committing yourself to selling the business.

runwayUse the business sale market testing process to learn what potential buyers do and don't appreciate in your business, so that if you decide to fly on, you can put those insights to work during the rest of your journey. If we compare running a business to flying a plane, it's like going in for a landing through the clouds, taking a look at the terrain when it comes into view, but being prepared to pull up again if the conditions are unacceptable.

Here's how business sale market testing works:

  1. You need a credible stand-alone business plan for the next few years, showing recovery in the future. You need a sense of the value of synergies to a potential buyer today.

  2. You approach selected buyers confidentially (even on a no-name basis via an intermediary like Shield). You explain that you have a good plan to build stand-alone value for the future, but that you realise that a sale now may deliver enough of tomorrow's value today to make it a decision you are willing to consider. So you give them a short descriptive document and invite them to make non-binding offers for your business.

  3. You use this focussed, confidential process to find out:
  • what your potential buyers like about your business
  • and - more importantly - what they don't like
  • what worries them about your business
  • what doubts they have about it
  • what the internal nay-sayers are muttering
  • and what holds them back.
Then you have a choice; pursue the best terms you can negotiate and land a sale, or pull up, fly on and use the insights you have just gained to land a deal on better terms in the future.

The good thing is you won't have damaged the business the way a failed sale does, for two reasons:

  • First, because a business sale market testing process like this can be tightly focussed and extremely confidential (possibly even, as we said, on a "no-name" basis).
  • But more importantly, because you demonstrate from the outset that your business has an attractive future and you are simply exploring whether a sale today could deliver enough of that future value now to make it worth doing sooner rather than later.

Market testing before selling a business is like flying in low over the landing strip to take a close look before deciding what's the best course of action. If you think this may make sense in your situation, open up a channel to the chaps in the control tower at Shield and ask for Air Traffic Controller Young. Over...

Shield's Business Sale Market Testing starts at £5K per month. Contact us for a confidential chat, with no obligation.

© November 2008 Shield Corporate Finance


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