When it comes to selling a company, business owners come in all shapes, sizes and mindsets. Nonetheless, investment bankers typically hear three common objections from these business owners that could cost them dearly. If these objections go unresolved, the business owner could risk securing the optimum valuation and deal terms that best meet his or her financial goals.
If you own a business and any of the following objections resonate with you, consider changing your mindset. Below, I will explain why these objections can be costly to you, and attempt to put your mind at ease regarding the process and concerns you may have about confidentiality.
Objection No. 1: I don’t have the time and/or resources to pull together financial information for potential buyers.
At the end of the day, if you want to maximize your business’s value and discover all of the options available to you in the marketplace, there is only one way to accomplish that goal. You need to go to market with a very highly researched and targeted investor group, who would have an interest in investing in a company such as yours.
The first step in the process is to thoroughly research and prepare a Confidential Information Memorandum (CIM). The CIM describes the business and the industry in which it operates in great detail, while providing all of the detailed financial information that investors require prior to preparing an offer.
Owners must provide their investment banker with very detailed financial, operational and cultural information, so they can write a compelling memorandum. The CIM needs to be complete, thorough, professional and strategically prepared to present the company in the best possible light for the investor. If you want to get the most out of your company, you will need to dig in and do your homework. There is really no way to get around this step.
Objection No. 2: I don’t want to broadcast my private company information to the public.
It’s understandable that owners object to sharing their private information with potential investors whom they don’t know. However, the confidentiality of a client’s interests is top priority for reputable investment bankers, who stake their reputations on being discreet.
Successful and trustworthy M&A firms will only go to sophisticated investors who invest in companies similar to yours (including both strategic buyers and private equity firms) and who have shown they have an interest in investing in your space. It’s also likely that the M&A firm maintains an existing relationship with such investors.
Typically, the banker approaches these highly researched, targeted and vetted investors by phone first. The purpose of the call is a high level introduction of the opportunity, and no company name or location is revealed at that time. At that point, the investor will typically say “no, that’s not something we’re interested in right now,” “yes, we want to learn more,” or “we’re not in the market right now.”
If the investor is interested in learning more, then the banker will provide him or her with a 2-page executive summary that offers a few more details about the opportunity – again with no company name or location revealed. The investor also receives a very exhaustive, 5 to 6 page confidentiality agreement at that time. Only after the investor signs this agreement will they receive a copy of the detailed offering memorandum (or CIM).
Sophisticated investors know that there will be recourse if they violate the terms of the confidentiality agreement, primarily, that the firm representing the owners will not approach the investor with future opportunities. So, while an investment banker cannot guarantee that the confidentiality agreement will never be breached, such occurrences tend to be extremely rare. Therefore, as long as you have engaged a trustworthy investment banking firm to represent your company, you should not put off selling due to privacy concerns.
Objection No. 3: I prefer that you bring a single, well-heeled investor to me, so I can avoid negotiating with multiple buyers.
If an owner only has one buyer at the table, then the buyer ends up holding all of the cards. The buyer has no incentive to pay the highest price for the business. The investor’s goal is to make the best deal they possibly can for themselves, not for the owner. Consequently, if the investor is only willing to offer one price and one set of deal terms, the owner is not left with any other options and will have no basis for negotiating a better deal.
By going to the market broadly and putting investors in a competitive position with one another, you can drive the best valuation and deal terms for your company. In addition, you will know all of the options that are available to you.
The investor is instead in a position to conduct a privately negotiated transaction, knowing that others are looking at the same opportunity. Most investors prefer this method of negotiating to a sealed bid auction process, which many will not even entertain as a matter of course.
At this point, investors have spent a considerable amount of time and resources invested in the process, and they want to get the deal done. In other words, they are willing to negotiate. Investors almost always have flexibility on some points, and if they do not, they are dropped from the negotiation process.
In this scenario, you would clearly be in a better position than you would be with only one buyer at the table. Investors are still competing to secure a deal, and the investment banker is negotiating with multiple buyers to attain the highest valuation and most favorable deal terms available to you.
Face Objectives Head On
Selling a business takes time, resources and the right strategy. If you identify with any of these common objections, you should speak openly about such concerns with your investment banker. He or she can further explain the steps to take when selling your company and put your mind at ease.
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