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| Simon Gregory |
Understand why acquirers buy and don’t adopt a passive approach to selling the largest asset you will ever own
Most companies are bought rather than sold. In other words the acquirer will approach a number of targets, and seek to keep these targets away from other buyers. Their interest is to get you in as tight a corner as possible. There are definite tactics in place to ensure you don’t talk to others.
It works a little bit like this:
A company decides to grow their business via acquisition and will often approach one or more targets. Often the company making the approach is of such stature, that the seller is both flattered and drawn in by their interest. The buyer will try to put the seller fairly quickly under some sort of exclusive arrangement as early as possible in the relationship. Of course the buyer will then want to place consultants in the acquisition target to look at the company with a view to acquiring it.
If this acquirer is looking at lots of other targets (playing the field), then the possible deal seems to drag out over a long period of time, because they have limited personnel and a lot of potential deals to consider.
Every time you meet the acquirer and its representatives you feel more and more flattered, but as time passes by, you begin to wonder if anything is really happening. Then at last you receive the phone call ‘we have decided to proceed and buy the company, however as we have been looking at the company we have uncovered a number of things that gives us cause for concern. Your credit control is poor, there are a number of vulnerability issues with your clients, your sales director is getting older and we are wondering whether he might leave and we will lose business in the long term. For those reasons although we initially hinted at a sale price of Euro 6 million, we are taking a much higher risk than we thought initially, we are therefore reducing our offer from Euro 6 million to 4 million. Because we are taking a big risk, we are also only prepared to give you 50% of the sale price up front. The remainder will be based on future performance, and if the company meets its targets we are prepared to pay the rest.’
Every time you meet the acquirer and its representatives you feel more and more flattered, but as time passes by, you begin to wonder if anything is really happening. Then at last you receive the phone call ‘we have decided to proceed and buy the company, however as we have been looking at the company we have uncovered a number of things that gives us cause for concern. Your credit control is poor, there are a number of vulnerability issues with your clients, your sales director is getting older and we are wondering whether he might leave and we will lose business in the long term. For those reasons although we initially hinted at a sale price of Euro 6 million, we are taking a much higher risk than we thought initially, we are therefore reducing our offer from Euro 6 million to 4 million. Because we are taking a big risk, we are also only prepared to give you 50% of the sale price up front. The remainder will be based on future performance, and if the company meets its targets we are prepared to pay the rest.’
All along the tactic has been to secure your interest with the hint at a high price, drag the process out until you reach the stage where you might almost be prepared to give the company away, drop the price at the last minute, and then place terms and conditions on the deal that mean that you might not get the remaining 50% of the sale price. Once you have sold the business to them, you will no longer have control of the performance of the business and they may well do things to make sure you don't receive all that you thought you would receive.
What started out with great enthusiasm on your part, flattered by the approach of this larger company looking to acquire you, now turns to disappointment. Nevertheless you decide to sell to this buyer because it has taken you 18 months to get to the deal with only buyer you have. What’s to say if you tried to find another buyer, if you find one, what is to prevent them from putting you in exact the same position as this current buyer? Most company owners concede and sell to the buyer they have now.
The statement I made above ‘most companies are bought not sold’ is true and this is why when you talk to an accountant about selling your company, or even a lawyer, because they are used to getting involved when you have a buyer already, their experience flows along the lines of accepting terms and conditions being dictated to you. Everything seems to work in favour of the buyer rather than the seller and your advisers who are making good money out of the deal may well persuade you to sell because this is the only deal on the table. The reality is, that no one has done any work to secure other buyers. so you have no idea whether what they are offering you is a good price or whether in fact there are other willing buyers out there.
There is a very real sense that the balance needs to be redressed. The answer to this lies in understanding that although acquirers try to pay for the past (a multiple of profits based on past performance) in reality they are actually ‘buying the future’. That future has a value.
They are not buying the future under your ownership, they are actually buying the future under their ownership. Because different buyers will open up the future for your business in different ways, because they each have different resources to help your business grow, this should mean that you have a different price to different purchasers, however this will only be revealed in a competitive environment. It will not be revealed if you only have one buyer.
True Value
The value of your business will be driven by the strategic considerations or the opportunity you represent to the buyer as well as the opportunity the buyers presents to you.
Simply put, the real reason companies are bought is to do with future opportunity rather than multiples of past profit. However this will not be drawn out of the buyer, outside of having a competitive environment, i.e. you need to have a number of financially strong, strategically motivated buyers interested in buying, and they need to be interested in buying you at the same time as each other.
This is a real key to achieving maximum value.
When a competitive environment is missing, it is very difficult to persuade a buyer to attach value to the opportunity based on future performance under the buyer’s ownership. Without competition the buyer will want to convince you it is all about a multiple of profits routed in past performance.
Whilst past performance is important, no company was every acquired for its past. Every company is bought because of the future open to it within the structure of a larger player. However buyers will always try to convince you it is about past performance and a multiple of profits.
I will state this again, you need to have a number of strategically, motivated, financially strong acquirers all interested in your business sat the same time as each other.
To achieve this you need to be proactive in your search for a buyer.
Advertising the company for sale, in a newspaper, business or trade magazine, or on a web site, will not work!
If you advertise your company in any of the ways suggested above, you actually have no control over who is looking at that advert, whether they have any money, or when buyers might respond. You also have no control over whether all of the right companies that could buy you know about the opportunity. Each of these things creates its own problems.
No control over who is looking
Unfortunately in the M&A world there are lots of bargain hunters out there. People looking to make themselves a success by acquiring a company at as low a price as possible and later selling it on at a high price.
Databases, newspaper adverts and trade journal advertisements are the places where they hope to pick up a company for a bargain price.
What you should be looking for in a buyer, is another company that is significantly more successful than you are, not someone looking to make themselves a success by buying your business.
Databases, newspaper adverts and trade journal advertisements are the places where they hope to pick up a company for a bargain price.
What you should be looking for in a buyer, is another company that is significantly more successful than you are, not someone looking to make themselves a success by buying your business.
No control over whether they have any money
Often these individuals and even company owners do not have the finances to acquire your business for the price you are looking for. You can spend a lot of wasted time with individuals that come across as if they are well financed only to find out frustratingly that they do not have the cash to buy your business. They need to go to the bank to raise the finance. The bank will think Return on Investment, and want their money back within 2 or 3 years. This will result in a low multiple
No control over when they will respond
This is more critical than people think. When you advertise a company on a web site or in a newspaper advertisement, the problem is that you have no control over when people respond. You are simply sitting around waiting for a response. When you do get a response you have no control over when another interested party might respond. The first company will put you under a lot of pressure to sign some sort of exclusive agreement with them. You want to wait for others to respond, but the first prospect will play the card of ‘pulling out’ if you don’t deal with them, now. Nervous that you might lose this potential buyer, you agree and therefore fail to generate competition.
The opportunity remains hidden from many of the companies that could buy your business.
No matter where you advertise the company, newspaper, or database, it is very likely that most of the companies that could buy your company won’t even know the company is for sale. Many of the potential buyers of your business may be based in a different country, or be selling complementary rather than competitive products, and therefore will not know about the opportunity unless you make a direct approach to inform them of the opportunity. Many of the decision makers, particularly in the larger companies will need to be identified and approached directly, because they will not be reading the advert, or looking at the web site where you have advertised your company.
