The champagne isn't flowing just yet, but the climate for mergers and acquisitions clearly looks a lot more appealing these days. There's more equity available from financiers, and bankers are more ready to lend than they have been in years. One result? Business owners who might like to sell have a far better shot at it now. Eighteen percent of last year's Inc.500 CEOs intend to do just that in the next five years.
However, selling your business easily is not the same thing as selling your business at the best possible price. To reach that goal, it's crucial to keep emotions running high - but not your emotions. Here's why.
While many business owners are serial acquirers - and 14% of 2003 Inc.500 CEOs expect to acquire this year - far fewer are experienced at divesting all or part of a business. Of those who try, many end up negotiating with very few prospects - perhaps only one. For many entrepreneurs, their personal feelings for the business they've created can cloud their judgment about rational price targets. The consequences go beyond failure to realize the highest sale price. Improperly handled, a sale process can easily collapse with little or no fall-back to other potential buyers. And a seller can remain ensnared in contract conditions long after the deal has been signed.
In our experience, business owners who sell businesses at top prices and with few problems downstream have given their full attention to the business of selling. Far from dismissing a sale as a "disposal," they see it as an opportunity to create value and do not hesitate to devote resources, both internal and external, to maximizing that value. But that's simply the starting point. Successful sellers go on to apply the following five ideas, all of which foster a competitive atmosphere by invoking crucial emotional responses from potential buyers:
Owners who are selling the business often get too focused on what is "wrong" with the firm - particularly if the operation they are selling has not performed to their standards. But successful sellers see their businesses in terms of their attractions to potential buyers. Why? Because they know a lot about the "for sale" business and about the companies that may bid for it. For example, we recently advised a food company that was looking to divest its non-core bakery division. Although the division recently lost a big customer, we were able to work with the managers to highlight the bakery's new product developments and its new accounts instead of focusing on the negatives. The key is to accentuate the positive, identify (acknowledge and don't hide) the negatives, and offer possible solutions for turning the negatives into positives.
Emotions are supposed to be kept in control at work. But skilled sellers are masterful at putting emotion back into the process - in the hearts of prospective buyers. It's a simple idea, but one that few business owners utilize. After identifying all likely buyers - regardless of geography - and after due diligence has led to a shortlist of prospects, savvy sellers quickly get to know the prospects' motivations. Then, during negotiations, the seller works to get buyers' competitive juices flowing. (We think of it as bringing out business leaders' natural adrenaline.) It's important to get potential buyers thinking about "winning" the process.
Deliberately keeping several qualified candidates in play, the seller - or its independent advisor - paints a persuasive picture for each of them. With deep knowledge of what makes each one tick, the seller can present customized data showing how the acquisition could improve that buyer's profitability and market share. The scenario can also help buyers envision what happens if their top rival buys the business instead. The implication: "You'd be crazy to let your competitors get this one."
Working with a components company recently, we conducted the entire process with three bidders; the winner did not receive exclusivity until the signing of the purchase and sale agreement. They agreed to those conditions mainly because they were afraid they'd lose the company to another competitor.
The idea here is to establish a tight timeframe for the sale process - on your timetable, not the buyer's - with multiple milestones clearly marked out. By compressing the cycle time for the sale, the seller creates greater urgency, which almost always boosts the value of the deal, or equally important, maintains a "full" valuation through the process. You want buyers to feel they're always in a race - that they always have to catch up. But you have to keep the timeframe practical - and be clear about setting expectations for potential buyers. It saves time on both ends when everyone knows up front what is expected.
The fourth element is tight control of the information process. Again, the idea is to keep competitive tensions high. Smart sellers give potential buyers only the information necessary for each stage; they make buyers eager for "film at 11:00." To preserve maximum value, the most sensitive information - such as sensitive customer-related and product pricing information - is kept until the final stages of negotiation with multiple buyers still in the process.
Representing a recent business for sale, we provided projections in the offering memorandum that were significantly better than the firm's previous year's results. We outlined very specific details on how the firm would achieve the numbers, breaking them out by customer, contract, products, etc. The detailed support for the projections heightened the buyers' interest and the final offers were 50% higher than initial bids.
Crucially, the best sellers never hide the truth. They take pains to put any bad news on the table early on. If they do not, the consequent loss of trust - and loss of time - sets the deal back when the facts come to light, taking control away from the sellers and potentially derailing the entire process. Similarly, it's vital to give all prospects the same information at each stage. Uneven information-sharing is counterproductive not only because it can erode trust but because it robs the seller of effective comparisons among buyers.
We recently represented a firm that had positive earnings in the year of the transaction, but had lost money in the prior year. Potential buyers bid based on the earlier negative numbers. Instead, we asked for bids based on the forecast, saying we would support our request in the management presentations using examples to show why the company would not slip back into the red. We asked that they trust us, and we showed that the forecast was achievable. The company sold for 30% higher than the initial bids.
This fundamental emotional play relies on reasonable behavior and quick ways for the sellers to show they'll make good on their promises. Throughout the sale process, sellers must try to win and maintain the buyer's trust and promote fairness on both sides. There's a crucial point when the seller presents contract terms to the buyer. Let's say that a fair, mutually acceptable deal is represented by the middle of a football field. Rather than starting the deal at the 10-yard line, the seller picks a realistic start point - say the 40-yard line - by offering terms that accommodate what the buyer wants. This signals that the seller (a) wants to sell, and (b) is reasonable to deal with. A levelheaded "starting play" is encouraging to a likely buyer; it often elicits a reasonable response so less time is spent blocking and tackling to get to agreement.
Used together, these five pieces of advice keep competitive tension high until the last moment. Deep research uncovers the candidates; further research woos them in, ideally to face off against each other. The rivalry almost invariably produces a favorable deal at the highest possible price.
Moreover, the funds can be in the seller's bank sooner. Typically, it takes at least five or six months to complete a sale. Following the concepts described, companies can shave two to three months off the typical timeline. And, even if the deal does not go through, following these tips leads to a positive alternative: another interested buyer who's ready to talk.
R.Wade Aust is a managing director and Paul Colone is a vice president of Downer & Company, a domestic and global investment bank based in Boston.