How Business Sales Are Best Strategized, Conducted and Consummated
An easy-to-follow rundown of the variety of things to consider when selecting an advisor to help you sell your business.
Vendor selection of a business sale advisor is of paramount importance!
The referenced Divestopedia article written by John Carvalho does not discuss the importance of advisor selection by the vendors — see commentary following. That said, it is a worthwhile summary of three possible sales process scenarios that are available to business owners interested in transitioning their business pursuant to arm’s length sale. It will take business owners and their advisors about three minutes to scan this article, and they all should do that. They then might want to print the article and file it for current or future reference.
The business sale scenarios John discusses are: (1) a widely circulated auction, which he calls a “broad auction,” (2) a selective auction that targets specific potential purchasers — which he refers to as a “controlled auction.” He suggests there are two variations of a targeted buyer auction process, and (3) a “negotiated sale” where only one buyer is identified and negotiated with.
With respect to these scenarios, John suggests:
- A widely circulated auction is likely to generate the highest price, takes the longest time to complete and increases risk of confidentiality breaches.
- The targeted auction decreases risk of confidentiality breaches and can promote an upward price, but takes time to complete a transaction.
- A sale negotiation with one identified buyer is the most “expeditious and confidential” where “price is often compromised.”
I actively rendered business valuation advice to private company owners for over forty years. Periodically, valuation clients asked me if I would advise them on the sale of their businesses — and I did that on several occasions. Concurrently, I had business partners who actively worked in the middle market private company sales arena. As a result, I have what I think to be a good working knowledge of vendors and purchasers of businesses. I certainly have strongly held opinions on how business sales are best strategized, conducted and consummated.
First, for vendors, it is of paramount importance to select an advisor who:
- Understands financial statements and deal structuring.
- Preferably has experience in advising on the sale of a business similar to that of the vendor, and in the same industry(ies) as the vendor’s business(es).
- If he/she does not have hands-on operating experience in the vendor’s industry(ies), then he or she is willing to either engage a sub-contractor who does or is willing to work and share fees with a second advisor engaged by the vendor who does.
- Will not put his or her fee realization ahead of what is best for his or her vendor client.
Having said that, my own business sale experience leads me to add the following comments to what is said in the referenced article:
- Irrespective of how a business is marketed, the elapsed time from the commencement of the process to the closing of a sale typically takes longer than the vending party(ies) would like.
- It is difficult, if not impossible, to quantify “what a sale price might have been” — i.e., how much higher or lower it might have sold if a different business sales strategy and process had been adopted from those that were chosen and led to the sale closing.
- The most important first step in the sale of any business is determining (1) who the most likely strategic purchasers are for the business, (2) what specific synergies are apparent for each of them and how quantifiable by the vendor each of those synergies is, (3) how they rank in terms of the likely interest of each in acquiring the business that is going to be put “on offer,” and (4) whether the vendor has reasons not to include one or more of the identified strategic purchasers in the sale process.
- Confidentiality and non-circumvention agreements should be received from each potential purchaser, but there is really no way to police confidentiality. Accordingly, any information document that is prepared should include basic information only. That is, the document should provide enough high-level summary information that a potential purchaser will be able to prepare a non-binding letter of intent. However, that information should be restricted to include no information that, if made public, the ultimate purchaser or the vendor(s) would be concerned about.
- The more obvious evident possible strategic purchasers are, the more likely it is that a “targeted auction process” will be the sale process of choice.
See the book 50 Hurdles: Business Transition Simplified, pages 82-89 (https://goo.gl/EPtmxP) for further information and discussion on:
- Understanding strategic purchaser synergies (21 possible synergies are identified);
- Whether strategic purchasers will pay for synergies;
- Identifying strategic purchasers; and
- Quantifying purchaser synergies.