Shield's count-down of the top 5 tips for maximising value when it comes to selling a business continues. To see why communication is just so crucial, let's review the sequence of tips for selling a business so far:
Selling a business #5: Be dispensable: Prove your business can thrive without you. That's the top priority for any owner manager pursuing saleability and value maximisation. (Since it's also great for your work/life balance and your marriage, it ought to be a "no-brainer", but it's not easy for gifted Type-A entrepreneurs to make this transition unaided).
Selling a business #4: Set your sights on the best buyers: Since a business is only worth what someone will pay for it, be sure not to miss that "someone" special. Focus on potential buyers who can make the most of your business, its market share, customers, brand, technology, staff and cost structure. Spell out those synergies. And cast the net as wide as you can; since buyers are encouraged by each other's interest, let's plan to stimulate auction fever.
Selling a business #3: Go for growth: a buyer can afford to pay more for a business with profits that are growing than for one which is flat. The higher the growth of profits, the more a buyer can pay while still achieving his or her target return on investment.
However attractive your business, bear in mind that buyers are busy with their own businesses and with other acquisition opportunities. They have little time to figure out all the benefits that your business might offer them, so you are well advised to help them. And no-one has a greater interest in doing so than you!
The buyer is not your enemy (even though he's not your friend, either); he needs information on the attractions and risks in your business to build a convincing investment case for his management team and shareholders. Why should they put their money into buying your business, as opposed to buying another one or keeping their money in the bank? You'd better make that clear to them, or they won't set the price as high as they could and should.
Since everyone on earth realises that a buyer is buying the future, not the past, a Martian observer could be forgiven for wondering why on earth those selling a business show so little about the future of their business.
Rarely, if ever, do projections extend beyond three years, although most businesses have growth potentials that will not mature within a 3 year window. Why show such a limited view of the future?
The answer is that we aren't comfortable making precise predictions for the far future, which is a valid point. But if you were about to sell your house and you struck oil in the back garden, wouldn't you tell potential buyers about it, even if production wouldn't come on stream for 3 years? Yep, you'd be producing production predictions for the long term, with tables of probable and possible reserves feeding cash flow forecasts way into the future. And you'd be mad not to.
At Shield we strongly believe in telling the truth when selling a business, warts and all. That means commenting on the warts and explaining what wart treatments are underway. But it also means telling the truth about the potential, as best we can.
In this way we can have a rational debate about the future of a business for sale without being absurdly precise about long-term projections but without closing everyone's eyes to longer-term potentials.
It is useful to develop projection models based on a number of scenarios, not just management's prudent but often unambitious internal forecasts. While these projections must be credible, they must also show the company in the very best light. For example, so called "growth avenues" should be fully modelled. These may not all be achievable in the short-term by the current management but should indicate to potential buyers what could be achieved over time if the necessary resources are put to work in the business. It is only by identifying and then carefully communicating these future revenue and profit streams that your company's full value will be realised, helping you to achieve "tomorrow's value today".
When it comes to synergies, we saw in Tip #4 that synergy value can dwarf stand-alone value. It's all very well talking generally about this fabled synergy value but potential cost savings and synergistic benefits need to be fully drawn out, quantified and well communicated if the buyer is to pay "top dollar".
By taking the trouble to communicate and to quantify potentials, both stand-alone and synergistic, sellers help buyers see the rationale for paying much higher prices than they initially felt justifiable. Our experience in doing this kind of communication with and on behalf of sellers has been surprising, even to us, and certainly to them. (See our webpage "What do our clients say?"). It's fair to say that our recipe for probability-weighted projections regularly produces remarkable results.
Finally, it's vital to be in a position to communicate that other buyers are keenly interested too. That's because a buyer's default position is to pay as little as possible, to get the best possible return on investment. Only by having alternatives can a seller drive the buyers up to their "indifference points", at which they cannot pay more without failing to achieve an acceptable return on investment. In plain English, when selling a business "competition works wonders".
Quite why that's so crucial and how best to achieve it will be our topic next time, when our count-down reaches Top Tip #1 for maximising value when selling a business: "Create competition!"
© 2008 Shield Corporate Finance
Shield's Top 5 Tips for Selling a Business
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