In recent years, merger and acquisition activities have risen to an all-time high – both in number of transactions and in transaction pricing. Entrepreneurial owners who have built competitive winners are reaping tremendous rewards. Philosophically, it’s all that’s right about our free economy. The daring entrepreneur works 12-hour days, borrows money, bets the ranch, and slaves away to make his business great. It becomes great. He creates jobs. He produces quality goods and services. He pays taxes. He helps the economy. Surely it’s a good thing when his reward at last comes at the end of the rainbow, and he sells well.
But, alas, that is not always what happens. The sale of business experience isn’t always so rosy.
What makes one owner cash in for untold, almost preposterous riches, while another exits with barely tolerable pricing or with handcuffs to his desk for five years to come? The purpose of this article is to explore that question and the answers to the question.
In the real life workings of business ownership - particularly for today's technology companies and systems integration businesses - the timing of an owner’s sale of his business is typically not strategically planned well in advance. Sale of a business is far more frequently opportunistic – and dependent upon the owner’s chance receptivity to the regular barrage of calls he gets from possible would-be buyers. He has a bad day, or he sees a major investment or a major risk in front of him, and he says, “Maybe I should consider sale now.” Seldom does it occur that this owner would decide that it’s strategically the right time to sell, screen and hire competent professional help, identify and investigate buyers, and then initiate contact. Such actions are time-consuming, somewhat intimidating and well outside of the practiced areas of expertise of a business operator. Instead, the owner simply responds one day to the dozens of calls he gets, week in and week out, probing for interest in sale. The buyer he talks to may or may not be the “best” buyer. Alas, without careful planning and effort, the final sale of a business may be literally almost left to “luck”.
Back to the original question then – what is the element of difference that creates tremendous value and astounding business pricing for the lucky few? The answer is not a simple one-liner, but it’s close. Competition creates and drives value. It is the number one distinguishing characteristic for creating buyer appetite.
The single most common mistake sellers make lies in their lack of a professional strategic approach in their consideration of sale. They naturally have a great fear of talking to multiple buyers. Owners don’t know who to talk to. They don’t have time to talk. They mistrust the willingness of prospective buyers to keep matters confidential. So, they quietly move forward with one or two of the less-than-best buyers. Costly mistake!
In a market where the buyer wants the strategic fit, where he knows he is not alone in the search for that fit, and where the seller under consideration offers some special unique advantage, the buyer knows he will have to be competitive in pricing to win the day. The courtship is on!
The second most common problem for the inexperienced owner considering sale is often in setting his price. Buyers inevitably probe aggressively and ask point blank what the owner wants in pricing for his company. The seller feels rude, or even foolish, if he doesn’t respond. Regardless of the price set, the buyer will offer less. Thus, if pricing was 50% lower than the buyer might have been willing to pay, you will never know. If the price is 50% higher, the buyer will see the seller as foolish, unrealistic, and unworthy of pursuit.
Professional investment bankers will not set price. They make the buyer set price. Buyers don’t like that a lot, admittedly, but the best ones do step up to the plate, and take a swing. The market speaks, and price is set by the natural velocity of free trade and competitive appetite. A beautiful thing!
As advisors to business sellers, we see hard proof of these fundamental rules of our free market economy every day. In October of 1999 we were hired by a systems integrator to help them complete sale of their Company. The owners had the buyers identified, had a 10 million dollar cash offer from the buyer on the table, and really wanted to hook up with that buyer. However, they knew the pricing wasn't very good. We helped them ask the buyer to reconsider and make their proposal more competitive. To ensure competition, we also talked with a few other buyers. The original suitors raised their proposal to 25 million cash plus 15 million dollars in post-closing incentives. We closed the deal in January, 2000. Quite frankly, I suspect we could have closed for even more with other suitors, but our client truly loved the original buyer, and was pleased with the deal.
Was the buyer being unreasonable to try to buy the company for 10 million dollars at the front end? No. They had a responsibility to their shareholders to buy as economically as the market would allow. We, however, were most pleased to help them justify an improved market price. Subsequent to closing, the buyers and sellers continue to be extremely pleased with the relationship, and are prospering financially.
So where are all these good and competitive types of buyers? Who will they court next, and why?
The technology and system integration industries are in metamorphosis. They are blossoming. They’re changing. Companies which were once machine shops doing sheet metal with some onsite assembly have grown up to be turnkey design/engineering houses, and system integrators, and more. Little pocket niches are emerging for companies which cater to one specialty customer type – or even to one customer alone.
The winners in this fast-changing market will be the business owners who have
a) the savvy to pass the baton to the next generation before stumbling into a growth plateau they can’t handle, and
b) the strategic foresight to professionally orchestrate sale instead of reacting to the buyer who happens along.
The moral of the story is – opportunities abound. Enormous wealth is possible, more than ever in history, for the astute business owner. New business investors will provide capital and opportunity for growth to all-time highs. Live, learn, and stay alert. Prosperity, profit, and amazing opportunities lie ahead!
Deborah Douglas is Managing Director of the Douglas Group, a St. Louis-based private investment banking firm. For more information on sale or purchase of companies, call 314-991-5150 or email her at ddouglas@douglasgroup.net.
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