25 Mar Strategic Auctions: Steps for Garnering a Premium When Selling a Business
The greatest value-drivers in any sales scenario–whether of a company or a product–are bolstered by the economic rules of supply and demand. Want a higher price? Then decrease supply and pump-up demand. Luckily, in mid-market deal-making supply is always slimmer than demand, but unfortunately that doesn’t mean any truly qualified buyer is willing to overpay one iota for a business. Most of the work from an advisers perspective in boosting value will come from the demand side of the equation. Demand-boosting for a business includes everything from tapping existing networks within a particular market niche to doing active outreach. In most instances, it means finding multiple strategic buyers, corralling them together for a strategic auction and negotiating like heck to garner a premium.
Financial Buyers vs. Strategic Buyers
In the world of M&A we can typically chunk buyers into two separate categories: financial buyers and strategic buyers. There are stark and important differences between the two which will bear greatly on the eventual outcome of your merger or acquisition. Financial buyers are typically represented in the likes of private equity groups, family offices or any “fund” looking for good proprietary deals. In other words, they’re looking to get a great cash-producing company below market and on-the-cheap. And while such buyers are plentiful, they’re often not the best fit for value maximization for the would-be seller.
Strategic buyers, on the other hand, represent those who’ll be looking at your business from a higher level and a longer-term vision. They may be a competitor in a different geographic market or they may be a similar firm looking for the right company to vertically integrate its processes. In short, a strategic buyer recognizes the synergistic value of an acquisition of your firm. They know 1+1 will equal 4 if they play their cards right. As such, they’re typically willing to pay more. Combine a higher willingness-to-pay (WTP) with the auction process discussed earlier and you have perfect fodder for getting a deal done that significantly beats a book or standard fair market value for your business.
The key to the supply/demand boost in this type of scenario is couched in the idea that demand for the business is best served with many strategic buyers at the feeding trough at the same time. Get a feeding frenzy between strategic buyers and the dust will almost always settle well above fair market value.
Valuation Tweaks and Assumptions
Business value is not directly tied to last year’s cash flows. Adjustments can and should be made to bring the bottom-line profits back to market. For instance, there are a few add-backs that can and should be considered when recasting the Income Statement before taking a business to market. They could include some or all of the following:
- One-time CAPEX or large expenses. One-time expenses are frequently added-back, providing a boost to profits because they’re not reflective of the business “as a going concern.”
- Owners’ expenses. Owners frequently run personal expenses through their companies. While some might consider it “piercing the corporate veil,” it remains fair game for an add-back when looking for the true business value.
- Owners’ salaries. Entrepreneurs typically overpay themselves, whether in salaries, bonuses or draws, they’ll typically overpay themselves above market rates for a similar “management” position. Making reasonable assumption on the add-backs here is helpful to boost the bottom-line.
- Other expenses. Some companies might be very generous on employee bonuses, healthcare and other compensation plans. If they’re above market, they should be adjusted and appropriately added-back.
When the tweaks have been made, then the final EBITDA number should be more reflective of the value of cash-flows being regularly produced by the company. This will be extremely helpful in obtaining the true “fair market” for the company’s value.
The Finer Points of Negotiations
The rubber meets the road in negotiations. Doing negotiations correctly is like a dance. There is give and there is take, but the art is in asking for more without offending and causing the buyer to walk away. Maintaining control of the situation in a negotiation scenario is much like dating. The person that cares the least always has the most power in the process. Selling the sizzle, pumping up demand, reminding the buyers of short supply and then coming back for another round price increases, earnout deals and seller employment incentives is at least one way to keep the buyers in the pool, while still maintaining civility and order.
One thing is absolutely certain when it comes to negotiations: no two scenarios will ever be repeated. Regardless of the industry and players, each scenario takes on a mind of its own. Agility is maintained by representation who not only knows the basics of MOST scenarios, but who is also good at working on his/her feet, shooting from the hip and “playing it cool.” Negotiating is fun for some and absolute torture for others. Advisers who’re the best at it are those who’re able to garner massive premiums for their clients’ businesses.
Examples of Client Premiums
I can paint three pictures in the last year where the buyer paid well over a 40% premium of even our wildest expectations for the business value. We implemented a repeatable strategy and kept disciplined throughout the process, keeping all the buyers in the mix and on specific target dates and deadlines. This helped to maintain order and provided structure through a process that is certainly known for its ambiguity. At the end of the day, all three buyers remained happy with their decision and glad they were able to be the acquirer of choice. Most important, however, was the seller who was able to walk away with millions in excess of his wildest expectation. Paying our fee was–as he put it–“a pleasure.”
There hasn’t been a better time for selling in a long time, but that doesn’t mean anyone should be in a rush. It just means considering it may be a wise move.