The Anatomy of a
"Home Run" Business Sale
For
every industry in the U.S. today, where companies are operating at a
profit, there will be opportunities for sale sometime in the next
decade--at magnificent success pricing. When we say "magnificent
success pricing," we're talking about the "grand slam home run" in
business sales--to truly cap an entrepreneur's lifetime of hard work
with the ultimate reward.
Our firm has generated quite a number of such "home run" sales of companies over the past 18 years.
In
designing the first of our monthly newsletters for clients, prospects,
and advisors, we asked a number of our contacts what helpful topics
they would most like to see covered in our newsletter. We gave
them a menu of possibilities. At the top of the list was "Anatomy
of a Home Run Business Sale."
In our experience, we have seen
several commonalities to these "home run" business sales. Several
of the most critical points to such success are as follows:
Creating Intense Competition among Buyers--
Every
buyer has a responsibility to purchase a targeted company at the lowest
possible purchase price. Even in those wonderful situations
where, due to synergies between the two businesses, it is truly a 1+1=3
combination, the "extra" 1 doesn't automatically get paid to the
seller. The buyer will only stretch to maximum potential in
pricing, if he "must" stretch, in order to win the deal.
Let us provide some real-life examples of how this works:
Several
years ago a prospective client came to us with an offer in hand to buy
his company for $10 million. The owner had a feeling the price
was too low, but wasn't sure what his company was worth. The
company was growing tremendously, was extremely well run, and was in a
niche that we knew many buyers would be excited about. Upon
accepting the engagement we made it clear to the buyer that we were
also talking to alternative suitors. In less than 30 days, the
original buyer increased his proposal from $10 million to $25 million
in cash at closing, plus another $15 million if certain prospective
targets were met. The seller closed the deal about 60 days later,
and has since gotten every dime of the additional $15 million.
A
couple of years ago our firm sold a consumer products company, which
was headed for about a $12 million sales year, and was profitable at
almost 1/3 of sales. The company was growing rapidly, and for its
last completed year had only about $7 million in sales. We
received 18 offers to buy the company, most at a $15-20 million
purchase price level. (This equated to a pretax earnings purchase
multiple of 5.5-6.5, on HISTORICAL earnings - but gave little heed to
the tremendous growth in process.) We received 2 offers
well north of $30 million - one at $32 million from a private equity
firm with some related industry holdings, and one at $35 million from a
strategic industry player. (Only these most competitive buyers were
willing to pay a sensible price on current trends and immediate
short-term prognosis.) The equity fund buyer was flexible on owner
transition terms, was committed to a very fast closing timeline, and
was generally positive and good to deal with, boding well for the
future of the seller's long term employees and the company he had
built. Our client accepted their $32 million offer.
Finding Indirect or "Adjacent" Buyers--
Creating
intense competition is a function of managing an effective selling
process, but it's also more. It's exploring every possible,
creative, 360-degree prospective buyer that may be related - even
tangentially, to the selling company's business. Many of the sellers we
talk to begin with an assumption that they probably "know" the best
likely buyers. Most commonly they are thinking of those who are
their fiercest competitors, who they know would be delighted to
eliminate the competition. In 80% or more of these cases, the
early identified "best" buyers prove NOT to be the best.
The
best buyers in many cases are the players who are in an adjacent
business space. They may be companies which serve the same
customer base, but with very different products. They may be
companies who have similar products, but have focused to date on a very
different customer clientele - and who thus benefit from entrance to a
new customer group.
We sold a
general contractor which provided internal building and equipment
design and build-out to material handling customers, like major
warehousers and delivery service companies. Our client bid virtually
every project each year (no "automatic" recurring business) and they
were dependent upon major capital projects for utility of their
services - both of which tended to reduce pricing in the minds of most
buyers. However, our client had a very major project just under
contract with an extremely desirable customer - Federal Express.
The company was about $30 million in sales, and was profitable (pretax)
in the high teens as a percentage of sales. The new Federal
Express contract was for $60 million of work, to be done over a several
year time-frame. We had about 25 offers for this seller, all at
the $30-$35 million price point.
Fortunately,
we were tenacious enough to keep looking for more and better
buyers. At last we got some background information on what else
Federal Express bought extensively as they built new facilities.
For example, we learned that they spent vast amounts on sortation
equipment, and on conveyor belting for use in these facilities.
We targeted those slightly different types of manufacturers, who we
hoped might get excited about the access to Federal Express. In
one week, we got 3 offers in excess of $50 million. We closed
that deal about 2 months later for $67 million - all cash! (The
premium buyers were found!)
Capitalizing on the Great "Moment" of Desire--
Every
business owner is approached frequently, by would-be buyers probing
sale. If the owner courted each and every such prospect, it would
be the ONLY thing he does in his business. 19 in 20 of such
approaches are intermediaries trolling for new work, or are
bargain-hunter "strategic buyers" - who look constantly and tirelessly
for bargain deals in the marketplace.
However, sometimes, the
buyer is real, has money, and is serious in intent. Owners need
to remain alert and be ready to capitalize on the rare and golden
opportunity that will some day come along. When you sense that
you have a real and enthusiastic suitor, who is likely to pay the
premium - get help. Professional intermediaries will in virtually
every case justify their fees in significantly increased pricing.
Our
firm performed consulting services for one of the nation's largest
unemployment service companies, for several years. This company
was approached a couple of times every year by well-heeled and very
substantial providers of other services to the Fortune 500. Our
client had relationships with about half of the Fortune 500, with the
unemployment consulting services they provided.
We
entertained proposals from several of these suitors over the years -
but our client's mindset as to "price" was extremely high, so most we
ended up passing on. Finally, about 3 years ago, our client was
approached by a slightly small, but very well-capitalized publicly held
suitor, with a substantial war chest for just such an
acquisition. Our client at the time was slightly over $30 million
in sales. They hired us to help in negotiations. We sold
the company to the public suitor for $80 million - all cash! On
the same day, the same buyer also purchased our largest
unemployment-consulting competitor - which was larger than our client,
and more profitable. The competitor got $40 million, on the same
day that we got $80 million for sale - so their investment in
professional help paid off!
This
past year we sold a limestone kiln operation to a steel manufacturing
supplier, who had approached them several times over the past couple of
years. Our client attempted to accept the offers proposed (more
than once), but every time, something went amiss, and they didn't get
closed.
They hired our
firm, and the competition we generated really nurtured velocity for the
transaction. We ended in sale to the steel supplier who had
approached several times before. (If we hadn't closed with them -
we would have closed with one of 3 or 4 alternative suitors, who were
making fast progress.) Again, the foresight to capitalize
professionally on the strong marketplace paid off!
Every
business sale doesn't result in the home run of a lifetime.
However, the prudent and opportunistic business owner, who remains
alert to his marketplace, CAN create a lifetime of financial security -
a fitting reward for the risk and hard work that owners endure!
|
By Deborah L. Douglas
|
Are You Considering Selling Your Business?
Learn How To Prepare Your Company
To Sell At Top Price!
|
|
|
|
|
Free Audio CD
Learn How To Sell Your Busines
A 75-minute conversation with Deborah L. Douglas, author of "Cashing In! Selling Your Company For MAXIMUM PRICE."
In
this interview, renowned business guru Fred Gleek asks Debbie Douglas,
a nationally acclaimed market merger and acquisition expert, to share
her wisdom and wit as she recounts dozens of real-life deals and
"tricks of the trade" for business owners preparing to sell their
business.
Topics include:
* Owning a Salable Company vs. "Owning a Job"
* The Selling Process
* Why & When To Sell Your Business
* Today's Marketplace for Merger & Acquisition Activity
* How Competition Increases Selling Price -- Significantly!
* The Family Business - When to Sell and When to Pass Along
* The Secret Benefit of the Intermediary Shield
If you're considering a future sale, you WILL not want to miss Debbie's expertise and advice.
|
|
|
|
Read More Articles on Selling Your Business
CLICK HERE
|
|
|
|
|
