Selling Your Business To A Financial Buyer vs. A Strategic Buyer
Whether you want to sell your business next year or a decade from now, you will have two basic options for an external sale: the financial or the strategic buyer.
The Financial Buyer
The financial buyer is buying the rights to your future profit stream, so the more profitable your business is expected to be, the more your company will be worth to them. Strategies that are key to driving up the value of your business in the eyes of this buyer include de-risking it as much as possible, creating recurring revenue, reducing reliance on one or two big customers, cultivating a team of leaders, etc.
The Strategic Buyer
The alternative is to sell to a strategic buyer. They will care less about your future profit stream and more about what your business is worth in their hands, typically calculating how much more of their product they can sell by owning your business. Strategic buyers are usually big companies, so the value of being able to sell more of their product or service because they own you can be substantial. This often leads strategic buyers to pay more for your business than a financial buyer ever would.
For example, Nick Kellet’s Next Action Technologies created a software application that takes a set of numbers and visually expresses them in a Venn diagram. Next Action Technologies was generating approximately $1.5 million in revenue when they received their first acquisition offer; Kellet’s first valuation was for $1 million, a little less than revenue, which is a pretty typical from a financial buyer.
Kellet knew the business could be worth more to a strategic buyer, so he searched for a company that could profit by embedding his Venn diagram software into their product. Kellet found Business Objects, a business intelligence software company looking to express their data more visually. Business Objects could see how owning Next Action Technologies would enable them to sell a whole lot more of their software, and they went on to acquire Kellet’s business for $8 million, more than five times revenue – an astronomical multiple.
Preparing For Every Eventuality
The question is: why bother making your business attractive to a financial buyer when the strategic buyer typically pays so much more?
The answer is that strategic acquisitions are very rare. Each industry usually only has a handful of strategic acquirers, so your buyer pool is small and subject to a number of variables out of your control; the economy, interest rates, the competitive landscape and a whole raft of other variables can all impact a strategic acquirer’s appetite to buy your business.
Think of it this way: imagine your child is a promising young athlete who’s intent on going pro. You know that becoming a professional athlete is a long shot, fraught with unknown hurdles: injury, the wrong coach, or just not having what it takes to compete at the highest levels. Do you squash her dream? No, but you do make sure she does her homework, so if her dream fades she has her education; you make sure she has a back-up plan.
The same is true of positioning your company for an exit. Sure, you may want to sell your business to a strategic buyer in a spectacular exit, but a financial acquisition is much more likely, and financial buyers are looking for companies that have done their homework – companies that have worked to become reliable cash machines.
Want to see how sellable your business is? Click here to learn more and take a 13 minute Sellability Score survey.
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The Three Ways to Negotiate
Basically, there are three major negotiation methods.
1. Take it or leave it. A buyer makes an offer or a seller makes a counter-offer – both sides can let the “chips fall where they may.”
2. Split the difference. The buyer and seller, one or the other, or both, decide to split the difference between what the buyer is willing to offer and what the seller is willing to accept. A real oversimplification, but often used.
3. This for that. Both buyer and seller have to find out what is important to each. So many of these important areas are non-monetary and involve personal things such as allowing the owner’s son to continue employment with the firm. The buyer may want to move the business.
There is an old adage that advises, “Never negotiate your own deal!”
The first thing both sides have to decide on is who will represent them. Will they have their attorney, their intermediary or will they go it alone? Intermediaries are a good choice for a seller. They have done it before, are good advocates for their side and they understand the company and the seller.
How do the parties get together in a win-win negotiation? The first step is for both sides to work with their advisors to settle on the price and deal structure positions. Both sides should be able to present their side of these issues. Which is more important – price or terms, or non-monetary items?
Information is vital to a buyer. Buyers should keep in mind that the seller knows more about the business than he or she does. Both buyer and seller need to anticipate what is important to the other and keep that in mind when discussing the deal. Buyer and seller should do due diligence on each other. Both buyer and seller must be able to walk away from a deal that is just not going to work.
Bob Woolf, the famous sports agent said in his book, Friendly Persuasion: My Life as a Negotiator, “I never think of negotiating against anyone. I work with people to come to an agreement. Deals are put together.”
Copyright: Business Brokerage Press, Inc.
Read MoreWhat Business Owner’s Should Do Now to Sell Your Business in a Year
I came across this article from Axial with some simple but important ideas in preparing to sell your business.
Selling a business is a long journey. Around 82% of businesses are on the market for four to twelve months before selling, with the majority selling between seven and nine months. However, wasting time during the transaction process is often avoidable. Spending a year preparing can seem unnecessary and frustrating, but this work lays the groundwork for a quick, successful sale.
Here are the four things you should be doing now to sell your business in a year.
1. Build a Team
When it’s time to sell your business, it can be tempting to go it alone. But it’s been proven that a team of trusted advisors with transaction experience helps business owners secure higher acquisition premiums when they sell. Before going to market, engage an investment banker or M&A advisor to guide you and your company through the process. Advisors also suggest strategic and management changes to companies preparing for sale to increase their value. These small changes spruce up a business prior to sale in a predetermined time frame, usually between six months and a year. Because of this, getting an advisor on your side should be the very first step you take when setting the selling process into motion.
2. Fine-tune Financials
The single most important factor to a buyer is the health of a potential purchase’s financials (thoughcybersecurity is rapidly becoming a close second). A company’s financial statements should always be accurate and well-documented. Gather financials from the past three to five years to review with an accountant. At the very least, financial reports must be free of inconsistencies and speak to the health of the company, but seasoned buyers are also looking for signs that you monitor financial performance and then make adjustments that can improve profits. If your financials tell the story of a lifestyle business focused on personal compensation and not true growth, you might have a problem.
3. Figure Out Your Value
Before you make any broad changes to increase your company’s valuation, you need a benchmark to work from so you can make accurate predictions about value add. Get knowledgeable about the valuation models buyers use in your industry or category, and learn about valuations of comparable companies in your industry.
4. Think About Your Team
It can be difficult to stop rumblings about a sale once the ball gets rolling. At this early point in the process it’s important to consider how this affects your employees and how you eventually plan on informing them. While’s it’s not necessary to have a clear plan in place this far in advance, start thinking about what information you’ll share, as well as when and how. Over- and under-informing employees can incite panic, so think carefully. Pre-sale prep can seem daunting and even a little frightening, but the more work you put in before you start the sale process in earnest, the more time you save later.
By , Axial | April 14, 2016
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Due Diligence — Do It Now!
Due diligence is generally considered an activity that takes place as part of the selling process. It might be wise to take a look at the business from a buyer’s perspective in performing due diligence as part of an annual review of the business. Performing due diligence does two things: (1) It provides a valuable assessment of the business by company management, and (2) It offers the company an accurate profile of itself, just in case the decision is made to sell, or an acquirer suddenly appears at the door.
This process, when performed by a serious acquirer, is generally broken down into five basic areas:
• Marketing due diligence
• Financial due diligence
• Legal due diligence
• Environmental due diligence
• Management/Employee due diligence
Marketing Issues
It has been said that many company officers/CEOs have never taken a look at the broad picture of their industry; in other words, they know their customers, but not their industry. For example, here are just a few questions concerning the market that due diligence will help answer:
• What is the size of the market?
• Who are the industry leaders?
• Does the product or service have a life cycle?
• Who are the customers/clients, and what is the relationship?
• What’s the downside and the upside of the product/service? What is the risk and potential?
Financial Issues
Two important questions have to be answered before getting down to the basics of the financials: (1) Do the numbers really work? and (2) Are the seller’s claims supported by the figures? If the answer to both is yes, the following should be carefully reviewed:
• The accounts receivables
• The accounts payable
• The inventory
Legal Issues
Are contracts and agreements current? Are products patented, if necessary? How about copyrights and trademarks? What is the current status of any litigation? Are there any possible law suits on the horizon? What would an astute attorney representing a buyer want to see and would it be acceptable?
Environmental Issues
Not too long ago this area would have been a non-issue. Not any more! Current governmental guidelines can levy responsibility regarding environmental issues that existed prior to the current occupancy or ownership of the real estate. Possible acquirers – and lenders – are really “gun-shy” about these types of problems.
Management/Employee Issues
What employment agreements are in force? What family members are on the payroll? Who are the key people? In other words, who does what, why, and how much are they paid?
Operational Issues
The company should have a clear program covering how their products are handled from raw material to “out the door.” Service companies should also have a program covering how services are delivered from initial customer contact through delivery of the services.
The question is, do you give your company a “physical” now, or do you wait until someone else does it for you – with a lot riding on the line?
Selling Your Business When It’s Your Identity
The following is a recent podcast from Built To Sell by John Warrillow founder of The Sellability Score about a business owner Yvonne Tocquigny who used a professional valuation and competition to raise her sell price by 3 x’s.
Yvonne Tocquigny built her advertising agency up over 35 years working with clients like Jeep and Dell. Then in 2015, she got a call asking if she would consider selling. The problem was that her agency had become part of who she was. Part of why Tocquigny feared selling was that her agency had become part of her identity, which is an issue we deal with when we help clients through The Envelope Test, module 12 in The Value Builder System. To get started, get your Value Builder Score now.
About Yvonne Tocquigny
Yvonne Tocquigny launched her company, Tocquigny (TOH-KEY-KNEE), in 1980. From its inception, it has built a talented team of makers, thinkers and doers—all working within a company culture that complements the uniqueness of Austin. Tocquigny has been named a top agency by Adweek, B2B and Clutch, and Tocquigny herself has become a business trailblazer, a sought-after speaker, a respected writer and a mentor to many.
In 2015, Archer Malmo, a leading brand communications agency based in Memphis, approached Tocquigny. Learning that Archer Malmo shared many of her business’ philosophies and values, and understanding that the combination of the two shops would better serve the agency’s clients, Tocquigny made the bold move to join forces. Despite the company’s change of name, the agency’s work remains the same and, as Chief Creative and Strategy Officer of Archer Malmo, Austin, Tocquigny remains a popular columnist for the Austin Business Journal and is a frequent speaker for groups of CEOs across the country, international Six Sigma organizations and groups of startup entrepreneurs.
Tocquigny is a founding partner of The Capital Factory, an inaugural member of the Advisory Council for the School of Undergraduate Studies at the University of Texas and a member of the Advisory Board for the Harry Ransom Center at the University of Texas. She recently presented at BMA15, the largest B2B marketing conference in the world.
Click here to hear the podcast.
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Considerations When Selling…Or Buying
Important questions to ask when looking at a business…or preparing to have your business looked at by prospective buyers.
• What’s for sale? What’s not for sale? Does it include real estate? Are some of the machines leased instead of owned?
• What assets are not earning money? Perhaps these assets should be sold off.
• What is proprietary? Formulations, patents, software, etc.?
• What is their competitive advantage? A certain niche, superior marketing or better manufacturing.
• What is the barrier of entry? Capital, low labor, tight relationships.
• What about employment agreements/non-competes? Has the seller failed to secure these agreements from key employees?
• How does one grow the business? Maybe it can’t be grown.
• How much working capital does one need to run the business?
• What is the depth of management and how dependent is the business on the owner/manager?
• How is the financial reporting undertaken and recorded and how does management adjust the business accordingly?
Successful Closing When Selling Your Business
The closing is the formal transfer of a business. It usually also represents the successful culmination of many months of hard work, extensive negotiations, lots of give and take, and ultimately a satisfactory meeting of the minds. The document governing the closing is the Purchase and Sale Agreement. It generally covers the following:
• A description of the transaction – Is it a stock or asset sale?
• Terms of the agreement – This covers the price and terms and how it is to be paid. It should also include the status of any management that will remain with the business.
• Representations and Warranties – These are usually negotiated after the Letter of Intent is agreed upon. Both buyer and seller want protection from any misrepresentations. The warranties provide assurances that everything is as represented.
• Conditions and Covenants – These include non-competes and agreements to do or not to do certain things.
There are four key steps that must be undertaken before the sale of a business can close:
1. The seller must show satisfactory evidence that he or she has the legal right to act on behalf of the selling company and the legal authority to sell the business.
2. The buyer’s representatives must have completed the due diligence process, and claims and representations made by the seller must have been substantiated.
3. The necessary financing must have been secured, and the proper paperwork and appropriate liens must be in place so funds can be released.
4. All representations and warranties must be in place, with remedies made available to the buyer in case of seller’s breech.
There are two major elements of the closing that take place simultaneously:
• Corporate Closing: The actual transfer of the corporate stock or assets based on the provisions of the Purchase and Sale Agreement. Stockholder approvals are in, litigation and environmental issues satisfied, representations and warranties signed, leases transferred, employee and board member resignations, etc. completed, and necessary covenants and conditions performed. In other words, all of the paperwork outlined in the Purchase and Sale Agreement has been completed.
• Financial Closing: The paperwork and legal documentation necessary to provide funding has been executed. Once all of the conditions of funding have been met, titles and assets are transferred to the purchaser, and the funds delivered to the seller.
It is best if a pre-closing is held a week or so prior to the actual closing. Documents can be reviewed and agreed upon, loose ends tied up, and any open matters closed. By doing a pre-closing, the actual closing becomes a mere formality, rather than requiring more negotiation and discussion.
The closing is not a time to cut costs – or corners. Since mistakes can be very expensive, both sides require expert advice. Hopefully, both sides are in complete agreement and any disagreements were resolved at the pre-closing meeting. A closing should be a time for celebration!
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