Competition Increases Your Business’ Worth
If you receive a phone call from a potential buyer, how should you respond? What do you do if he makes an offer?
We are in a seller’s market, and there are a lot of buyers chasing deals. Good businesses get calls from buyers regularly, and owners are often tempted to try and work that deal themselves, because they think they have a good buyer, and the price seems right.
However, in the end, the owner has a better chance of actually getting a deal done if they have selected an M&A intermediary to represent them. As M&A professionals, we know where the potential landmines are in the process – and there are a lot of them. Whenever you step on a landmine, or even brush up against it, because of your lack of familiarity with the process, one of two things is likely to happen:
- your deal may fall apart, or
- you may still get the deal done, but you’re going to leave money on the table and not know it.
One Buyer, Is No Buyer
If a potential buyer is the only horse in the race, that gives him power and leverage over the seller.
We work very hard to create competition for the business. People want to buy what’s hard to get; if they know they’re competing with someone else for the business, they’re liable to pay a lot more than they – or you – ever expected.
When you go to market without a price – which is our approach – it is very important to create an auction. To create an auction environment, we start out with good research, identifying the potential buyers – maybe a good synergistic buyer, maybe a financial buyer, maybe an industry buyer.
But until you have a full market scan and go to every potential type of buyer, you’re not going to have a good field of horses to start the race. When you run an auction, it’s kind of like running a horse race where you want all of the horses to end up at the finish line at the same time. So you start out with the right field of buyers; you do a very timed process, just like a horse race, that starts at a certain time.
Each buyer starts at a different pace, and each of them runs at a different pace. Again, our goal is to get them all to the finish line at the same time. So the timing of the process – when you go to which buyer – is important. We try to enforce very rigid rules; we have schedules and deadlines that buyers have to meet so that they know that they are in a race, there are other people next to them, and they had better give it their all if they want to get be the first to reach the finish line – even if it means paying top dollar, and far more than they originally intended.
Higher Price, Different Buyer
Several years ago, a gentleman called me on a Wednesday and said, “My lawyer said I should call you. I’m about to sign a letter of intent. A buyer contacted me directly about my business, we’ve negotiated for the last eight months, and he’s agreed to pay $6 million for it, but my attorney said I should talk to you before I sign the letter of intent.”
I said, “Fine, call the buyer, tell them this is the largest transaction of your life, and you want to be professionally represented. Give them my name and tell them I’ll call them in a couple of weeks, when I have my arms around the deal.”
The seller said, “Well, we can’t wait a couple of weeks – the letter of intent expires on Monday.”
I said, “It will wait. Trust me – I’ve done this before.”
He called the buyer and delivered the message, and the buyer said, “No! We don’t want a broker getting in the middle of this. We’ve spent eight months putting this together – please don’t get a broker involved.”
The next day, the buyer called him back and said, “If you leave the broker out of this – because brokers just delay things – it’s going to take forever. Leave the broker out of it, and I’ll give you $8 million instead of six million.”
But the seller stuck to his guns and insisted on using us. He became a client, and we ended up selling the business – not to that buyer, but to another buyer – for $10 million.
That’s a real-life example of how being represented, and attracting competition, is going to maximize your price.
If you have questions about your valuation or would like to find more buyers for your business, feel free to book a call with any of our senior Principals.
*This article originally appeared on IBG Foxfin site.