If you're going to sell your company in 2010, you need to think differently. Yes, there are buyers lined up with cash right now, but most are either looking for a high growth company that has been bucking the negative economic trend, or they're looking for a stressed balance sheet and shaky capital structure to pick up a "good deal."
For companies that are somewhere in the middle, you need to be better prepared than ever before. Buyers are going to be more critical and more likely to submit a low purchase offer unless they have a real understanding of your business. To submit a fair value purchase offer, they need to be convinced of the opportunity.
You need to have clear data and analysis of your business, systems and processes before you talk to any prospective buyers. This is in addition, to the more obvious steps of highlighting competitive strengths, weaknesses, business outlook, opportunities and benchmarking. Clear means well documented and easily understandable to an independent person who has no prior knowledge of your business.
Why is this data and analysis so important? Because when a buyer makes an offer to invest in your business, they should be well informed and understand the business with an insider's knowledge. If that happens, they feel less uncertainty. Less uncertainty = less perceived risk = higher purchase price.
To illustrate this point, it is useful to consider some of the differences between the equity valuation of a public company and a private company.
| Public | Private |
| Information Publicly Available Audited Financials Daily Pricing Information (Stock Price) Daily Analysis by thousands of analysts Highly Regulated Equity Liquidity Highly Liquid Instant trading of minority interest (stock market) Industry of brokers, agents and market makers All sources of capital available High competition for lending and investment Public Auction Process to Sell Majority Interest Valuation Multiple Relatively HIGH | Information Little Pricing/Valuation Information Rarely Audited Financials Non-GAAP Accounting Data available, but little or no analysis Slight or No Regulation Equity Liquidity Low liquidity Few ownership/equity transfers Majority enterprise interest Fewer sources of capital available Less competition for lending Negotiated Sale or Private Auction Process Valuation Multiple Relatively LOW |
Investors in public companies have easier access to more reliable and timely information, data and analysis than investors in closely held private companies. Why is this data and analysis so important? Because when a buyer invests in a public company, they are informed with research from thousands of analysts from many different perspectives. As a result, there is less uncertainty risk. At the time of writing this article, the average PE ratio for the S&P 500 was 20 compared to an average 5.2 adjusted EBITDA multiple for middle market private companies, according to a recent AM&AA report.
Yes, there are other factors to consider when comparing public to private valuation, such as stability and liquidity, but the bottom line is that investors will pay a significant premium for "ABC Manufacturing" public company than the comparable "XYZ Manufacturing" closely held private company. The price premium can be double, triple or more. Therefore, unless the buyer of XYZ Manufacturing has a deep insight into the business before they make an offer, they're going to price in their uncertainty with a lower multiple.
Yes, there are other factors to consider when comparing public to private valuation, such as stability and liquidity, but the bottom line is that investors will pay a significant premium for "ABC Manufacturing" public company than the comparable "XYZ Manufacturing" closely held private company. The price premium can be double, triple or more. Therefore, unless the buyer of XYZ Manufacturing has a deep insight into the business before they make an offer, they're going to price in their uncertainty with a lower multiple.
Let's be realistic. A private company is rarely ever going to sell for a public company multiple, but just bridging some of this information gap and shifting 10 or 20 percentage points towards a higher multiple can mean millions of dollars to you.
So, what can be done to bridge this gap? If you look at the typical closing process when you buy a closely held company, there is a boilerplate due diligence list. And due diligence nearly always begins after the sale price has been negotiated and the letter of intent has been executed.
If you're the seller, this is counterintuitive. If you want a buyer to stretch and pay maximum price for your business, they need to be fully informed when making an offer. After signing a letter of intent, they only have two real options. They either buy your business for somewhere close to the negotiated sale price or walk away. Yes, a buyer will often use due diligence to try and negotiate lower, but the majority of negotiations are already complete by that point.It has been proven to us time and again that it is better to lose a buyer earlier in the process than have them make an uninformed low ball purchase offer.
You should spend time preparing insightful analysis of your company before negotiating with a buyer. It is natural to want to get a feel for the market value of your business before spending too much time, but by moving forward too quickly, you will lose negotiating strength and are unlikely to ever find out what the market could really pay.
So, what analysis do you need to perform? Well, we can't give away our proprietary process, but it comes from the experience of the buyer's perspective and seller's perspective from countless acquisitions. It also depends on the size, type and complexity of the business. One thing is for sure, however. When a ClearRidge client brings a company to market, prospective buyers will have access to relevant, concise and convincing analysis, so their offer is going to be based on a much clearer understanding of the business. You will lose some buyers in the process, but you'll also sort through to find motivated prospects who are more likely to meet your price expectations.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2010.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.
ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
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