Most companies that decide to sell have some characteristics that can drive down the value of their company, such as customer concentration or having management all from the owner's family. In this article we will discuss how to minimize the discounting of the market by locating the right buyers.
We are in the middle of a merger and acquisition engagement, representing a Human Resources Consulting company. We have contacted several industry players and have gotten some good initial interest. Several buyers dropped out because the seller's entire management team was comprised of family members. We asked our client to take their company off the market and to bring in at least one non-family executive who had the authority and the ability to run the company. They successfully implemented this change and asked us to take them back out to market.
Because their business is counter cyclical and actually grew during the economic downturn, they posted some pretty impressive growth and profit numbers. It was difficult to determine how much of the improvement was due to the addition of the new senior manager.
As we re-launched our marketing efforts, we identified several interested buyers. One buyer was particularly interested and, after signing the confidentiality agreement and reviewing the memorandum, contacted us almost daily with additional detailed information requests. Before long, he started to grill us about selling price expectations. As we usually do, we deflected his requests and asked him to put together his letter of intent based on the value of the business to his company.
He started giving us a lecture about valuing service companies whose assets (meaning people) walked out of the door every evening. He pointed out that their revenues were based on new sales each year and not "contractually recurring revenue." We had our client put together a chart that showed the "historically recurring revenue" generated from their top 20 clients over the past five years. This was our way to demonstrate some consistency and predictability of revenues.
As we conversed further, my radar started buzzing loudly. This guy was getting ready to provide a lowball offer and was trying to sell me on all the reasons why I should go back to our client and pitch his offer. I politely listened to his well-practiced approach for a little while longer. Then he came up with the statement that I just could not let go. He said that last year's revenues were an unusual upward spike and, "I am just going to use 2015's revenues as my basis for my offer." I asked him how he would have made an offer if last year was unusually bad, but the prior five years were strong. He would not respond, but, of course, the answer was that he would have made his offer based on the new trend.
There are thousands of business buyers out there that are just like this guy. There is a famous residential real estate investor who wrote a book and gives classes to help individuals become real estate moguls. I could sum up his book and his class in one sentence: Find 100 people with their homes for sale, approach them aggressively and make a lowball offer and one of them will take it.
Then I reviewed where our buyer had originated, I traced it back to a posting we had made on our business broker's association website. As I think about it, these Business-for-Sale websites actually give these buyers a powerful tool to actively and aggressively contact their 100 potential sellers. I have seen this behavior repeated multiple times and the source was always a Business-for-Sale website.
So we are always preaching to our prospective clients to get multiple buyers involved in the process. If they post their business on one of the Business-for-Sale websites, they may get multiple buyers interested, but they are those buyers that are contacting 100 sellers very efficiently through the power of the Internet in order to make their lowball offers.
The good news is that we had six other industry buyers that we had contacted and they were looking for acquisitions that were based on acquiring new customers or adding another product offering, or leveraging their sales force or install base. In other words, their buyer motivation was not to buy a company with a lowball offer.
Encourage Fair Offers
The only way we can encourage buyers to make fair offers is to conduct an outbound marketing campaign to industry buyers that have strategic reasons for making acquisitions. If we can get several involved, then the buyer that comes in and says that she is going to base her offer on 2015 performance is easily eliminated from consideration. If a business seller is only going to attract these inbound, bargain seeker buyers from websites, he/she will only be getting low ball offers and waste a lot of time.