There are a lot of complexities when it comes to figuring out how to go about selling a business. For example:
· What is a fair price?
· How does one secure the highest price possible?
· What terms are reasonable?
· How do you find the best buyer candidates?
· How do you maintain confidentiality?
· Do-it-yourself or hire a broker?
· When and how to utilize your attorney? CPA?
· How do you screen and qualify buyers?
· What information should you provide to buyers, and when?
This article answers the question: How is business sale price maximized?
The answer: Process. Packaging. Dealmaker skill.
The Proper Process
Price is maximized when the business is offered to all the best buyer candidates simultaneously; all offers are procured at the same time; and the best offers are worked against each other with skill and savvy until all have made their best and final. The seller then picks the winner and the runner-up; tries to close the transaction with the winner; and lets the winner know the runner-up is standing by. If the winner tries to change the deal or becomes unreasonable, unable, or unwilling, move to the runner-up.
Is it possible to run this kind of process? First, you don’t want the buyers to recognize that this is the kind of process you are running. It has to be done with tact. Second, it depends on the business, the number of buyer candidates for the business, and whether the buyer candidates can be identified up-front. Often, they can.
The task is to run a process that gets as close as we can to this auction-type gold standard. When we do, offers will align themselves along a bell curve. The outliers will stand out.
An added and very important benefit of dealing with all the buyers (and their offers) at the same time, instead of one-at-a-time, is the time necessary to complete the process is compressed. Disruption to the business is thereby minimized, and it’s a lot easier to maintain confidentiality. Up and out, as they say, before the grapevine has time to do its thing.
Such a process puts the seller in control and keeps the buyer(s) honest. Add effective packaging and skilled representation and the result will be a maximized price.
Presentation matters. Autos sell for a higher price when cleaned up and on a well-lit car lot. We pay higher fees to attorneys that wear sharp suits and work in beautiful offices. Businesses sell for more when they are cleaned up and the information package is comprehensive, organized, colorful and professional.
In addition to “looking smart,” the offering documents should have all the information - in summary form - the buyer candidates want and need to make a decision. All footnote, supporting and backup information should be prepared in advance, organized, and held “at the ready” for buyers so the information can be provided without delay, in a clear and organized manner, when requested and appropriate.
Negotiation is an art and a science. Experience matters. Representation works. An experienced and gifted dealmaker can help the seller maintain confidentiality, avoid squandering time and money, run the correct process, and secure a deal that will more than pay for his fee and give you peace of mind that you didn’t leave money on the table.
Every business will have what is commonly referred to as its enterprise value. A basic or “core value,” if you will. For a healthy business, value is based on its ability to produce cash, and the dependability or volatility of the cash flow stream.
Many other characteristics impact value as well, such as growth, assets, liabilities, human capital, customers, competitors, threats, industries, demands, challenges, scalability, etc. These things make establishing value complex and subjective.
Value also varies based on who is doing the valuing. “Value to whom?” we ask. What the value is to a particular buyer is pretty hard to determine. Thankfully, we don’t have to figure it out. Just invite offers from all the buyer candidates, i. e. let them tell you.
Get an appraisal, you say? An appraisal is just one person’s estimate. If you are okay with the appraised value being high or low by 50% either way, then I see no problem with just telling a few buyers to pay the appraised value. But that’s not a process that will result in a maximized price with certainty.
In summary, how does the business seller go about securing a price that’s way out to the right on the x-axis? Employ the proper process, packaging and dealmaker skill.
Note: The questions raised in this article but not answered here will be addressed in future articles.
© 2023 David Lindsay Perkins, Jr. All rights reserved.
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David Perkins is a mergers and acquisitions and business valuation expert, business owner and investor, and an award-winning author. Check him out on LinkedIn. Send him a note via David@AcqAdv.com or through our contact page.