If you have a successful company that would be attractive to potential buyers, you owe it to yourself to be prepared for the day when the call comes, to know how to respond, and to truly understand how to maximize the market value of your company.
“Running a Trip To Tahiti”
A few years ago, our marketing of a business for sale generated interest from a professional buyer with which we were not familiar. Our initial vetting of that buyer included a call to the principal of a private equity group that we knew well.
When we asked what he knew about the buyer, he chuckled and said, “Well, they are really good at running a trip to Tahiti.”
The dead air on our end prompted him to explain his analogy.
“I’m a little surprised that they contacted you guys,” he said, “because they normally like to call business owners directly so that they can be in the driver’s seat right away. Here’s their MO: They come in with a high offer – let’s say $60 million, all cash – to get the seller to sign a letter of intent. Everybody’s happy, the seller thinks he’s got a great deal, and he’s starting to think about life after the sale.
“And then they start stretching out their due diligence – three months, four months, six months. Finally, they come back with ‘a problem’ – something really trivial. ‘There was a piece of bubble gum stuck under your conference room table, and all of my partners wanted to walk away from the deal, but I really want this, and I think I’ve talked them into doing it. So, we’re still ready to move ahead.’
“‘The only difference is that, instead of $60 million in cash, it’s going to be $30 million, with $10 million down and $20 million on an earnout over the next 10 years. I know that doesn’t excite you, but any other buyer is going to find that bubble gum under there, so you’re not going to do any better than this.’
“‘We can close this in two weeks, at this price and terms, or you can go back to market and run into the same thing and be at the same place a year from now.’”
Now we understood the Tahiti analogy. For the last six months, the seller had been mentally sitting on the beach, with a nice breeze, in a comfortable chair, with his feet up, a Corona on the side table, and $60 million in the bank. But after six months in his imaginary Tahiti, he was forced to make a choice: to take substantially less money so that he could really be at the beach in two weeks, or start all over with no guarantee of a better deal.
Running a Deal Vs Running a Process
That story illustrates just one of the perils of running a deal, with a single buyer that is the only game in town, and a seller who, in trying to run the deal on their own, finds their options severely limited.
Running a deal, without first “running a process,” is a shortcut that deprives the seller of choices and precious leverage. It limits the seller to running a deal with one buyer and two choices:
- do the deal with the only buyer in the picture, on their terms, or
- don’t do the deal
That is the reality underlying our mantra: One buyer is no buyer.
In contrast, running a process (described below) involves about 1,000 hours of professional preparatory work (performed largely by your M&A advisor and their team) that generally must be completed before you can effectively run the deal. The main value of the process is its ability to generate interest from multiple, vetted prospects. If you skip the up-front work, if you don’t attract multiple buyers, you forfeit many of the advantages that should accrue to the seller.
If you run a process, you can anticipate having multiple buyers, which affords you important choices in price and terms and in deciding which buyer will carry on your legacy. That discernment with respect to your buyer is especially important if the terms of the deal include your staying on for a time after closing or your ultimate proceeds depend on earnouts or future profits. Those relationships are a bit like a marriage, as compatibility and trust are paramount.
Our Six Step Sale Process
Our Sale Process generally consists of six key steps listed below. The first five are cumulatively crafted to attract competitive offers, maximize market value, identify the “best fit” buyer, avoid due-diligence surprises and maneuvering, and achieve a successful closing.
- Assess your company and the market.
- Package your business.
- Market your business
- Maximize the offer.
- Close the deal.
- Provide transition assistance.
By the time you’ve completed step 4, you have a signed letter of intent, and both parties are ready to start their due diligence. At that point, you are ready to actually run a deal.
What to Do if You Receive an Unsolicited Call From a Buyer
Now that you have a better understanding of what goes into a successful deal and what distinguishes “running a deal” from “running a process,” let’s return to the Tahiti scenario and examine how many business sales start: with an unsolicited call from a prospective buyer to an owner who hasn’t put his business on the market.
First, determine whether the purported buyer is (a) really a buyer and not a business competitor engaging in corporate espionage and (b) credible. In our experience, one out of 10 cold calls is from someone who checks both of those boxes; the other nine are fishing expeditions.
Second, protect your confidentiality. This is extremely important; we frequently encounter situations where the owner is so intrigued by a buyer’s offer that, when asked for “all your financials,” they provide it, with no confidentiality protection and no vetting of the buyer.
Third, if you’re interested in starting a dialogue, be appropriately evasive:
Let me get your name and number, and I will get back in touch with you.
My company is not for sale right now, but I’ve been considering some changes. I’ve thought about buying another company, or merging, or selling off one of our divisions.
I’ve got some professionals helping me, and one of us will get back to you to see if there’s a potential for more discussion.
In situations where IBG is under contract and representing the seller, we give them similar advice, plus this punch line:
Yes, we’re exploring all these options. As a matter of fact, I’ve hired an M&A firm to help me with this assessment. I’m going to give your information to my M&A team, and they will contact you.
Don’t be afraid that revealing your connection with an M&A firm will scare off the prospective buyer. In our experience, the more serious and desirable the buyer, the greater the likelihood that they will find value in our representing you. We have over 3,500 private equity groups in our buyer database, and a lot of them have told us they prefer buying companies through an intermediary because the owner and the business are more prepared.
How to Avoid the Trap of Having One Buyer
War story. We started this article with a story, and we will end it with one – a story that illustrates the value of “running a process” and avoiding the trap of falling victim to a solitary buyer.
One afternoon I received a call from a business owner.
“My lawyer gave me your name and said I should talk to you,” he explained. “I have a letter of intent sitting in front of me for someone to buy my business for $6 million. We’ve been negotiating for the last eight months, we finally got the letter of intent, and I’m ready to sign. But my lawyer told me to run it by you first.”
He came to our office the next morning and showed me the deal. My response, which undoubtedly included the admonition that one buyer is no buyer, went something like this:
“Here’s what I want you to do. Go back to the buyer, tell them that this is the biggest transaction of your life, you want to be professionally represented, and you’ve hired an M&A firm to represent you. I will give them a call in about two weeks, after I have my arms around the deal.”
“But they won’t wait two weeks,” he exclaimed. “We’ve been doing this for eight months, and the letter of intent expires on Monday.”
I told him not to worry, that after eight months of negotiation they will go a little bit longer. He reluctantly agreed, left my office, and called his buyer, whose response was predictable.
“Oh, no, don’t get some damn broker in the middle of this,” the buyer reportedly said. “They just screw things up, and they take forever to do it. Please – we’ve got our deal – please don’t do this.”
But the seller stuck by his guns.
The next morning the buyer called the seller to see if he had come to his senses.
“Are you getting rid of the broker?”
“No, I’m not.”
“Listen, if you get rid of that broker, change the deal to $8 million. I’ll do the deal today at $8 million if you don’t get a broker involved.”
He got me involved, and we ended up selling the company.
For $10 million.
To a different buyer.
One buyer is no buyer.
You may think that this article doesn’t apply to you because you don’t have any intention of selling your business. Or maybe you’re several years away from putting it on the market.
That may be the case. But if you have a successful company that would be attractive to potential buyers, you owe it to yourself to be prepared for the day when the call comes, to know how to respond, and to truly understand how to maximize the market value of your company.
At Eaton Square, we like to talk with business owners years in advance of a sale that’s not yet on their radar, to answer their questions, help them recognize the possibilities, and build relationships and trust that, through effectively “running a process,” will ultimately deliver top dollar in perhaps the biggest transaction of their life.
If you would like to discuss the value of your business, please book a complimentary call with any of our senior M&A Advisors.
*This article originally appeared on IBG Foxfin site.