Want to Sell Your Company? Put Yourself in the Buyer’s Shoes
Making the decision to sell your company is complicated. There are often a lot of emotions for owners as they move through the process. It’s exciting, stressful, intense, all at the same time. It’s critical that you, as a seller, take inventory of what matters to you in the sale process – whether that’s maximizing price, finding the best home for your employees post-deal, alignment on strategic vision, or something else.
But it’s equally important that you understand what’s important to the buyer. Because we’ve talked about the fact that sometimes, deals just don’t close (Why Do M&A Deals Die?). And failed transactions bring cost, risk, lost time and effort (for both parties).
So reduce the risk of a failed transaction by flipping the script – put yourself in the buyer’s shoes. Try to understand what they are actively looking for – as well as what risks they’re trying to protect against, what alternatives they have, and what they are willing to pay.
Let’s explore each of those areas in a little more detail:
Price (Valuation)
Buyer Priorities
Scarcity Value
Risk Management
1. Price.
For most sellers, price is a big piece of the puzzle, in fact, the biggest. Let’s be honest – outside of unforeseen circumstances, you probably wouldn’t be a seller if the price wasn’t going to meet your expectations. But your reservation price is only half of the equation. If there is no buyer at your reservation price, there’s no deal. So how the buyer thinks about price has to be part of the seller’s mindset.
The buyer is also very focused on price – trying to ensure they are getting good value for the price paid. Remember that the buyer is putting capital at risk, and that capital needs to generate a return – a return that meets their internal objectives. That capital is arguably not even the buyer’s capital at all – it belongs to the shareholders, lenders, really – and the buyer needs to protect the investment of these stakeholders. That is a limiting factor that often influences a buyer’s view on price.
The price framework typically starts with a general range of market values, based on the comparables and precedents. From there, buyers will analyze what gaps your company fills for them – growth, scale, margin, “strategic objective(s)”. And what risks they need to manage if they own your business. In fairness, there are intangible factors that may change the discussion from strict math to art, so remember, the numbers are important but not the only factor.
2. Buyer priorities.
Buyers look to acquisitions to change the business profile faster than they can do so via organic means. Many buyers are even very open and transparent about their priorities – they announce them on earnings calls, in press releases, in their conversations with industry and financial analysts and the media.
What boxes does your business check for the buyer – increasing growth, improving margins, adding scale, “strategic objective(s)”? More than one of these? Where it’s a quantitative element, benchmark your company against the buyer and its priorities if possible. If you are growing faster and more profitable, the buyer may be willing to pay a premium to market levels.
Qualitative elements can be somewhat more subjective – but consider how your product portfolio fills stated gaps for the buyer, think about how your business would help the buyer’s competitive position, or opens new market opportunities. What’s the industrial logic behind the buyer acquiring your business? The straighter the line you can draw from acquisition to value, the easier it will be for the buyer to see the rationale clearly. If you can’t do it in an elevator pitch, the strategic fit may not be that great.
3. Scarcity Value.
What are the buyer’s alternatives if they do not engage with you? Are there other companies the buyer could target if they feel your price is too high, the value too low, the risks too great? Can they build it themselves? Do they have time to build it themselves or is the market moving too quickly? What does their next best alternative look like? How much “scarcity value” is there in your business? When you start thinking about selling the business, it’s a great time to take stock of the competitive landscape, including identifying your direct competitors, companies that could enter the market directly or through acquisition, and replacement technologies.
4. Reducing Risks.
With all this said, buyers will still carefully examine the risks of an acquisition. Not only are they going to want to understand and quantify the overt risks (e.g. active litigation, a direct competitor’s announced new product launch) but also the risk that the business doesn’t perform to expectations. Expect the buyer to do whatever it can to understand and minimize this risk through due diligence. And their past experience in acquisitions may have direct influence on their behaviors in due diligence. What they have found during or after due diligence in other deals is likely to make them scrutinize some things that you may not consider. So the more introspective you can be – the more focused you can be on what you would be worried about if you were the buyer – the more you can address some of the risks early and perhaps even proactively.
Some questions to consider (definitely far from an exhaustive list…):
How did you develop your forecasts – are they based on identified customers, contracts and prospects or do they assume some assumed growth over last year’s results without much supporting evidence?
In other words, does the buyer have to take your forecasts on faith, or can they look at data: a pipeline, contracts in process, marketing initiatives, and do some math on probability and timing of conversion?
How fast is your company growing? How has that changed over the last 2-3 years? What has been influencing the growth rate?
Are your competitors growing faster or slower?
Are you gaining market share? Who’s taking share if you are not?
How profitable is the business today? What actions could you reasonably take in the near term to sustainably improve profit (i.e., foundational changes, not just window-dressing to boost the bottom line this quarter)
What do your customers say about your business? Do they come back for repeat engagements or purchases?
What makes your customers come back – is price the only differentiator or do you have unique offerings?
How sound is your balance sheet? Do you need capital to grow? Is that capital available to you at a fair cost?
Bonus Tracks: Other things the buyer is likely thinking about
Post-Closing Risk.
Not all issues present themselves during due diligence, or before closing the transaction...And buyers use a lot of tools to reduce post-closing risk. (R&W insurance, escrow, earnout, contingent payments, employment agreements). It’s important to think about the relationship between the purchase price and the flow and timing of funds (not to mention the certainty of future payments!)
Transaction Structure.
Deal structure may help reduce the price gap between the seller and buyer a bit. The buyer may find some tax advantages in undertaking an asset purchase instead of an equity purchase, for example, and be willing to raise their price a little to get the seller to agree. Not always the case but not worth ignoring. Real-life example - As a state with no income tax, Florida has attracted professional athletes to its sports teams for lower salaries because the players can take more home.
Remember, in an M&A context, while many sellers will focus on price first and foremost, buyers will look at price, their objectives, their alternatives, and the risks. You as a seller need to anticipate the areas of concern that will impact price, the issues that will force resolution pre-closing, and the deal-breakers. If you take the time to look through the buyer’s lens, you’re in a good position to negotiate a better deal.
Amplify Consulting Services LLC provides support to businesses in transactions and transitions. If you’re considering your future plans for your company, let us help you work through it. We offer coaching through webinars and seminars, hands-on transaction support throughout the planning, prep and process, and will roll up our sleeves to work with you at every step. Reach out and let’s discuss your objectives and let us help you achieve them. Visit our website at www.amplify-cs.com or get the conversation started by reaching out at info@amplify-cs.com