M&A Premiums Through Both Limited & Strategic Auctions
Let’s face it; anyone who wishes to eventually sell-out of their business and move on in life would like to go out with as many fireworks as possible. What does that generally mean in the M&A world? For some it means an “all cash” deal. Most others don’t generally care how they get paid as long as the money comes in—generally through some source of financing. What sellers tend to care about above anything else is a buyer who wishes to acquire at a premium.
Everyone wants to be the next YouTube—that sensational start-up that gets Google gobbled for a billion plus after barely a year of existence. In reality, such an acquisition is the exception rather than the rule. Unless you have a highly compelling reason for such a move by a large company such as Google, then you’ll most likely be having a traditional valuation and merger—not one that involves a heavy weighting of “goodwill” on the acquirer’s books.
The Network
Perhaps one of the best and proper keys to success when courting buyers is to see what type of network they have built. Longer-standing companies generally have more extensive networks. Some businesses, such as those involved in Global M&A or InternationalM&A have specifically partnered with national and international groups to expand their ability to connect with potential buyers from around the globe.
While the network is helpful it’s not everything (ask Verizon—they’ve been selling their “network” for years). Today’s proliferation of technology allows for nearly anyone with a connection to the web to search out and find those companies who may be up on the chopping block. Pay attention to the network. The next best thing to the network is the selling company’s guerilla marketing savvy and capabilities. This is check box number two in qualifying a potential seller for your firm.
Being a Premium Company
In our experience, brokering a deal is a lot like courting a mate. First impressions are always the most important. That means when it comes time to sell your business you need to put your best foot forward. Selling when the market is hoppin’ is helpful (this has been part of the problem over the last couple of years—bad returns for everyone makes it difficult to make anyone look good). Here is the specific piece of advice: if you want to be acquired at a premium, you need to be a premium. It’s that simple. There must be some differentiated asset or factor in the sale of your business—sometimes it is potential—which means you should have an extremely high reason to believe.
Not only should the Confidential Business Review look flawless, but it should showcase your company’s assets and successes in such a way that makes it irresistible. Here are a few specific pointers:
- During the selling period be highly precise on all accounting and transactions which take place.
- Sell, sell, sell. I am a intense proponent that the best measure of success in business is how much is sold. If you can sell massively just prior and during the courting phase, you will help to prepare yourself for a more premium acquisition.
- Get your costs in order. When you can’t verily boost revenues, you can generally only look at the next best side of the books: costs. Don’t be too ridiculous here, but makes sure you slash some unnecessary spending. This will help to boost the bottom-line.
Don’t Rely on Speculation
Some owners may argue, “my business was worth a premium because I inputted the ‘know-how’ to make it so.” Perhaps, but obtaining a premium price from a large and influential buyer is something that does not come around very often. In fact, there are generally only a couple of reasons why a business would pay more for your company than the discounted cash flows or financial statements suggest: they are speculating. And when you start discussing with your M&A advisor what your company is worth, be practical. Do not count on speculation from buyers when selling your company.
In software M&A examples abound of large multiples being used to calculate the sale price of a company. The largest technology giants, such as Microsoft and Google, often pay top dollar for fledgling start-ups whose potential outweighs the large premium which is paid. In fact, there are some examples where large software giants paid a premium because the company needed to be acquired for strategy reasons—to keep the competition from buying first. If your business is lucky enough to be the benefactor of such an offering, realize it is more of an anomaly than a regularity.
A specific acquisition by Microsoft illustrates a perfect example of this. The company was called aQuantive—a company which allowed for online advertising which was acquired around the same time Google acquired DoubleClick. Microsoft paid a ridiculous sun for aQuantive: $6 Billion—the most it ever paid for an acquisition in its history. In this case, Microsoft was being strategic. While aQuantive had a good platform and was making revenues, the promise of large growth from aQuantive was obscure. Microsoft had to do something to fight the rise of internet wonder Google. If you do an online search for “aQuantive” and “Microsoft” you will find commentary on how Microsoft has not recouped its money on the acquisition. But perhaps they would have lost more money down the road if a competitor had gobbled them up first. Lucky aQuantive found themselves in the middle of a strategic play at an extremely good time.
Betting on strategic play by the competition is unlikely. Extracting more value than your company may be worth is often the dream of speculative get-rich-quick fanatics and has nothing to do with solid business and work, which are both key requirements for the fulfillment of the American Dream. Working on the “next killer app” can be exciting because of its eventual promise of a payout, but don’t always count on a 10X multiple when selling your business. When this does happen it is usually a rarity and based on speculation or strategy or both. I am a natural cynic, but who knows perhaps you will be the next “goodwill” write-down on Google’s books. Wouldn’t that be nice.
Selling the Sizzle
Sell your company’s sizzle. Not necessarily the steak and you will have positioned yourself for in a fantastic position, which may allow you to get potentially gobbled up by a larger organization. You never know; perhaps you are software company with some compelling “next killer app” which could be taken to the masses. If so you could find someone willing to acquire for 10X. However, I personally am more of a fan of steady, consistent and sustainabile businesses. Purchasing that type of premium is flirting a bit with speculation. But that is a topic for another day.
*Note: in saying this, it is important to understand that you can run the risk of overselling your company. Be sure you perform full disclosure to any potential buyers. The picture should not be more rosey than reality. Good acquiring PEGs should be able to see through this, but sellers beware.
Using Strategic Auctions for Obtaining a Premium
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.”
Selling Momentum
Sometimes it’s best to just be a sell-out. There are a number of reasons for this. We get a myriad of different types of requests for people wanting to be the “sell out.” Selling out brings to mind the image of a “one hit wonder” band who never creates anything unique again because they keep publishing what everyone wants to hear. In business, it’s quite a bit different. Being a sell out in business is okay. Most often, that is one of the signs of success. For serial entrepreneurs, that’s often what they work toward, but what about those who are afraid of “selling out.”
Here is an example of a good sell out. An entrepreneur who creates a product or service to the point that it is wildly profitable, recognizes his or her limitations and maximizes the return by selling the business. In fact, a number of the clients we work with in our network have worked on various projects, many of which have included patents and intense product designs and creations, only to sell them a short time later after the *** hit the fan. On the other hand, there is the potential seller who has a great deal of selling anxiety and who thinks, “maybe now is not the right time.”
This is often true, especially with a steady and solid manufacturing company or a real estate business–especially if you are attempting to sell it during a recession. However, if you are attempting to sell a clothing company whose revenues are based on the current fad or style and you are making more than a couple million in annual revenue, you should really consider selling out and selling out quickly. Styles are fickle. Peoples’ choices change and my advice would be to get a quick payout today with the profits you are currently showing.
This is, of course, unless you have other plans to grow your business and stay on top of the latest fashion trends, which could be what you would like to do. Otherwise, selling out is the option I would choose. You never can predict the future. You certainly could eventually end up being the Facebook of of fashion with wild mainstream adoption, but chances are you will be more of the rule than the exception.
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.
- Covid-19 Impact on US Private Capital Raising Activity in 2020 - May 27, 2021
- Healthcare 2021: Trends, M&A & Valuations - May 19, 2021
- 2021 Outlook on Media & Telecom M&A Transactions - May 12, 2021
