The perfect small business sale? We recently concluded the sale of a client’s business. Through our eyes it was pretty close to a perfect sale.
The target sale timeline was met. The Seller exceeded the minimum agreed price.
The Buyer paid the price they thought the business was worth to them and the first few weeks of business trading immediately after they took over were in synch with the financial summary we had put together.
All good … so what did we do to nail this half pike with a triple backflip and perfect entry?
We put it down to the following 6 core elements that were used in tandem throughout our sale planning and execution process.
1. Sale by Expression of Interest.
Most small business sales are done by advertising a ‘sticker’ price and then a process of downward negotiation. Many think you counter the downward pressure by simply starting higher than your minimum acceptable price. One of the unintended consequences of this approach is that you miss the opportunity to interact with genuine buyers – they’ll just pass over a clearly overpriced business and move on to other opportunities. The business will then just sit there and start to get a ‘stench’. Eventually the business will need to be severely discounted to overcome the stigma.
Another major flaw with this approach is that traditional valuation methodologies are used to determine the price. In many cases these traditional methodologies just don’t account for the wide variances in perceived value that occur for personal, situational, synergistic, competitive and time based reasons. Over many EOI processes I have consistently seen an enormous variance in the range of offers – the highest offer can be up to 250% of the lowest offer. For all the academic purity of the Multiple of Earnings or other methodologies each buyer, without the framing of a sticker price, sees the same business opportunity differently.
The Expression of Interest (EOI) process does not start with a price for the business. And it may or may not include a close off date.
Potential buyers are provided with comprehensive information – in a staged manner – and asked to put an offer in. As a result I get peppered with the following question, or variations of it, “but what does the owner really want?”
I give the same answer each time. Offer the most you’re prepared to pay for the business based on your own circumstances. And remember, it’s a competitive process so don’t miss out by starting lower than you are actually prepared to pay, because you might just miss out!
2 things usually happen. The buyers that genuinely want the business do the work and submit an offer. The “buyers” who aren’t really prepared to do the work and probably didn’t want it badly enough drop out.
2. Use of a virtual data room
We are using virtual data rooms for all out engagements now. A virtual data room is essentially a highly secure, password protected website that stores all the information related to the deal. In addition to be very administratively efficient there are 3 main advantages in using a virtual data room;
- You can control the release of deal information in stages based on an ongoing assessment of the bona fides of the prospective buyer. In any deal it is critical that the release of commercially sensitive information is carefully managed for both the existing owner and the eventual buyer
- You can track if prospective buyers are looking (or not looking if that is the case) at what information and how often. This provides a very good guide for me as to who is serious and who is not
- Every business continues to evolve during a sale process. Financial performance and key trends shift quickly. The ability to quickly distribute up to minute financial performance (e.g. last month’s sales figures) can really help to sell the deal to the genuine buyers, who are so influenced by what is happening in the business “this week” and not so much by what was written in that 6 month old Information Memorandum.
3. Quality preparation
This is really simple for us.
- We don’t go the market until we understand the business, in most cases as intimately as the owner
- We contemplate the questions that we know buyers will ask. We ensure we are ready to answer them – it just makes the sale process work more effectively.
The smallest business sale will still involve;
- A Seller
- A Buyer
- 2 sets of Lawyers
- 2 sets of Accountants
- Financier for the Buyer
The professional fees in a small business sale (with say a business value of a few hundred thousand dollars) can quickly escalate (as a percentage of the end sale value). Worse still the sale falls over because everyone assumes someone else is responsible. You need one party to take control and run the project so that you will turn the offer into a legally binding, tax efficient sale contract. We do that because we know it needs to be done. It ensures the business owner gets a result and we get our success fees!
5. Laser targeting of the prospective buyers
We figured out a segment of our database that would be interested in the business and sent a highly targeted email. We got 130 opens out of the 170 sent – pretty impressive right!
While we won’t always have a suitable database of buyers someone will. It might be a professional association or an industry body.
For many businesses the genuine prospective buyers are going to come from within the industry or profession or supply chain. You’ve really got to question the “hit & miss” of traditional advertising methods
6. Focusing on building trust between Seller and Buyer
Over the course of a typical business sale process there will always be a mix of complex emotional, personal and commercial issues to grapple with.
At the heart of them is often basic issues like;
- Is the Seller telling me a whole lot of whoppers? What can or can’t I believe?
- Is the Buyer going to lead me down the garden path and then abandon me or renegotiate me?
The impact of these will be magnified in an environment where there is little base trust and / or an over reliance on ‘one step removed’ professional advisors.
We take the approach that we need to build the bridge between the Seller and the Buyer. Some of this done by acting as a go-between and some by ensuring that you have quality information and a good flow of information back and forward.
But most important of all is the ability to know that sometime you’ve got to step back and let the Seller and the Buyer “get to know each other a little” – it can be scary to let go but ultimately if the develop a mutual trust and respect then the deal has a far higher chance of progressing.