You own a unique company with its own distinctive characteristics and competitive advantages. There is a very low supply of privately-held midsized companies. You may only have a handful of competitors in your space. So, if an entrepreneur, strategic buyer or investor wants to enter your industry, they either have to either overcome what may be significant barriers to entry or buy one of the current market participants. Companies in your industry are few in number.
Demand
1) Consider how many thousands of corporations, financial buyers, wealthy investors and operators want to get into your industry.
2) Of the thousands of buyers for midsized companies in the US, there may be as many as a few hundred who would have real motivation to buy a company like yours and would be prepared to pay at least a fair market price.
3) Of these several hundred, there may be thirty or more who would enter into a bidding competition any pay a very attractive price to buy your company. First of all, however, they need to know that the opportunity exists.
Only a few logical buyers?
It is a regular statement from owners of successful businesses that there are only a few logical buyers for their company. This may be true for your company, but nine times out of ten, you just need to think outside of the box to identify who else might offer the highest price with the terms you are looking for.
When a large public company is acquired, there is information available to every potential suitor in the world. In most cases, you can be sure that a public company has sold for the highest price possible on that given day. Why? Because every possible buyer had information available to allow them to bid on the company.
And remember, just like a public company, you own a valuable asset in short supply.
Unfortunately, when it comes to selling a midsize company, you don't want to let the whole world know you are selling your company. The downside of keeping it a secret and only talking to a handful of buyer prospects is that you give the buyers the power and negotiating strength when in fact you should be the one in control.
Unless you take a direct, pro-active approach, you are going to be at the mercy of luck coming along at the right time and after a few phone calls, having the right buyer take an interest. Even if the best buyer came along, they’re not going to pay you the highest price, because they don’t have to.
If a buyer suspects that there are only a few others competing to acquire your company, they have limited competing bidders to worry about. Statistically, there is such a remote chance that any of the other buyers are going to pay a premium price, that all they have to do is wait until you are worn down and ready to accept a reduced offer. At most, they will only pay a fair market price. Why would they pay any more if they don’t have to?
And, even after they have signed a Letter of Intent to buy your company, they can always stall the process by giving it enough time during due diligence and highlighting some weaknesses. Every company has faults, and they’ll just use some of yours to pretend that they are less interested and less willing to honor their initial offer. As long as potential buyers play the waiting game, chances are you’ll end up selling to them for a significantly lower price than what they are able and willing to pay.
Watching and Waiting
Unfortunately, as we have all learned in life, simply waiting for something good to happen, rarely rewards us. Instead, we need to make sure that every prospective buyer who could have a real interest in acquiring your company is at least made aware that there is a company of your size, type and approximate location available to buy.
They won’t know the name of your company, you won’t compromise confidentiality, but you will learn which prospective buyers are really motivated.
There is demand, but it’s up to you to find it
Remember, there is demand out there for your company, but unless you are proactive and carefully consider your approach, buyers won’t come to you in sufficient volume to give you the negotiating strength necessary to enhance the value of your company. Over 80% of clients who hire ClearRidge ultimately choose to sell to a buyer they have never heard of and almost certainly not one that appeared on their shortlist of the best buyer candidates.
Plan of action
So, what should your plan of action be? First of all, search for the hundreds of strategic or financial buyers who could have an interest in your company’s type, profile and industry (of course, without them knowing who you are).
Second, before they find out which company is for sale, make the prospective buyers jump through a few hoops and prove their motivation (i.e. with examples of previous acquisitions they have completed, capital they have available, an estimate of terms they would be prepared to offer and their experience in your industry). That will get the list down to a more manageable number.
Third, get them all to sign a confidentiality agreement.
Only then do you share the identity of your company.
What is the result?
High Demand (30 or more buyers) + Very Limited Supply (only your company available)
= Significantly Higher Sale Price.
= Significantly Higher Sale Price.
It is not easy to perfect this process, but the logic is very clear.
Put yourself in a position of negotiating strength and you will be amazed at how you can achieve a significantly higher price, agree to better terms, and also ensure that the deal process is completed in an efficient and timely manner.
Just ask a friend who has sold their business the wrong way, and they’ll tell you all about the missed opportunities, complications and problems that occurred along the way.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.
M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.
Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.
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