Establishing an Asking Price For Your Business Acquisition
Finding the time to take away from your business to work on selling it can be difficult, especially when you’ve spent a great deal of time working in your business. When it comes time to sell, however, it’s a great time to start working on the business. Of course a broker will tell you that you should go through some type of business specialist for the valuation and general sales process for your company, but even if you feel you want to sell your business by yourself, there are some fundamentals which you should adhere to in the process.
With that in mind, let’s move onto sales price. No, not the price itself or how it is obtained, but more on how it is treated in thenegotiation process of the business sale. Here is a simple rule: do not bring up, discuss or mention the price you wish to obtain for your business.
Why You Should Never Discuss Price
Now, on to a short story. A transaction which took place a very long time ago with a medium-sized oxygen take supply company and a large oxygen tanks supply company illustrates this point. The smaller oxygen tanks supply company, with offices in Denver, Colorado was steadily growing with clients in Colorado, Wyoming and Utah. With this growth, the owner could see the only way to quickly expand was to acquire the other customers in the surrounding areas. These customers were owned by a much larger corporation headquartered in Canada.
In his attempt to expand, the owner of this small, but growing enterprise reached out to the Ontario-based company asking if they were interested in selling of their division in the Denver area. To his surprise, the executives responded by saying, “we don’t sell, we buy.” With that, the executives asked him if he would be willing to sell. “For the right price, certainly,” was his response.
Without discussing price, the client quickly responded by saying, “let me send you some information on my company, including tax returns, clientele, etc. and you get back to me in a week or two on a price you would be willing to pay.” After a week, he received a call indicating they would be willing to pay $XX million. He quickly responded by saying, “I was thinking more like $XX million” (a price several million higher than the initial offer). “We’ll get back to you in a few days.” To shorten the story, the seller was able to obtain his desired price for all the assets of his company.
Avoiding showing the cards can be a difficult temptation to avoid during the initial selling stages, when you are courting buyers. In my friend’s case, he wasn’t courting multiple buyers, but he knew what he was willing to sell for because he knew both the extrinsic and intrinsic value the company held.
What if the story ended with him asking his price first? Perhaps they would have taken the offer, but that’s simply not how it works in these types of transactions. The term “make an offer” is something you will hear in so many instances. Sellers don’t make offers, buyers make offers.
Some may think this type of activity shows a struggle for power, which is completely true. One party is attempting to gain power of information over another. Because of the buyer’s position, he/she should always keep power on their side of the court.
With all this said, it is important to be patient. If your business has worth as an cash producing asset, you will eventually see the right buyer come along. When this happens, let them court you buy asking the questions. It is good to not be overly zealous in this stage of the business brokerage.
How to Establish an Asking Price For Your Company
One of the first questions that are asked when business owners are considering the option of selling his or her business is “how much is it worth?” This is a great question that many techniques have been developed to answer. Some valuations are generated through a discounted cash-flow, others are generated through an EBITDA multiple, others are generated through a market value of all of the company’s assets. Lets take a look into each technique.
Discounted Cash-Flow (DCF): this is generated by using historical data and future expectations to generated a forecast of how much cash-flows the business will experience over a given time period—generally five to ten years. After the forecast is generated then a discount rate is used to give a present value of the future cash-flows. The discount rate is often one of the most controversial issues in a DCF valuation. The opinions about what rate is apply vary so widely that most analysts will always provide a different value.
EBITDA Multiples: Most use a multiple of, give or take, 4X EBITDA. The factors that determine whether to use a higher or less than multiple depend on the industry average and the factors within the particular business that would make it worth more or less. This method is often employed to avoid the use of so many variables the are included in a DCF.
Asset Valuation: This is the technique that is used to replace the value when the DCF and Multiples produce a value less than the market value of the assets. This is often the case when businesses just aren’t producing like they probably could be. This can also apply in industries, such as construction, that are so capital intensive that they just don’t offer a very good return for the dollar invested.
Establishing a Fixed Price vs. a Fixed Multiple
We previously worked on a strategic rollup with one of its private equity partners. The partner has engaged Deal Capital to find a number of business owners looking to sell trucking and logistics companies that can be rolled together into a larger platform. As part of this rollup the private equity group has been offering the companies that have signed the Strategic Acquisition Agreement an EBITDA multiple bases on the valuation placed on the business. Once the rollup has been completed each of the companies will be paid the EBITDA multiple that was agreed upon calculated with the most current EBITDA at the time of closing.
While this is beneficial because it give the private equity group a clear understanding of what it is paying for the cash flows, it is also risky. When a company knows that it is under a Strategic Acquisition Agreement it can begin to do things that may increase the currently EBITDA but may not necessarily be beneficial to the corporation in the long run. While these things may or may not be discovered during the due diligence they are not beneficial. It is for this reason that it may be better to agree on a price rather than a multiple.
Two of the companies that were brought into the rollup by Deal Capital’s M&A professionals had an idea regarding the price that the owners would be willing to sell at, however, as we danced around an EBITDA multiple we decided that it would be better to offer a flat price for two reasons, one was to make sure the sellers would be happy at the time of closing, the other was to ensure that the owners would keep working in the best interest of the company prior to closing rather than doing what would be beneficial in the short term and not necessarily beneficial in the long term.
Conclusion
When all is said and done a business is valued the same way a pencil, car, picture frame, or any other object is valued. It is worth whatever the market is willing to pay for it. If an analyst performs a valuation and no one is willing to make an acquisition at that price then that is not what the company is worth. If an auction is put together on a business then all of the bidders will continue to push the price up till it reaches its true value.
This is why we highly recommend that you engage the experts as Deal Capital. We will give you a range that we believe your business will be able to sell for, but don’t stop there. We will work especially hard to ensure multiple buyers are brought to the bidding table to ensure that they push the asking price to the true market value of your company.
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