TRICKS OF THE TRADE: GETTING A PREMIUM PRICE FOR YOUR COMPANY, PART TWO
This post is part two of a four-part series exploring the process of selling a small business. Be sure to also check out Part One.
Make Buyers Compete
OK, so how does a seller get a better offer if he or she doesn’t give a price (as suggested above)? Make buyers compete with each other. Effective competition between buyers will get you what your company is worth…and more.
In terms of valuation, there is no substitute for buyer competition. A seller cannot talk an individual buyer into over-paying. Buyers of small businesses are often private equity funds that are managing millions or billions for investors. Someone who can raise billions and buys and sells companies for a living, does not “pay-up” without competing bids.
When there is competition, who knows where the value can end up? Beauty is in the eye of the beholder…let buyers figure out who thinks the company is the prettiest.
Too many sellers think they can talk one buyer into over-paying for their company. This isn’t necessarily wrong; it is just a lack of experience on the part of seller that buyers like to take advantage of. These buyers are often private equity funds that are managing millions or billions for investors. Those funds did not raise billions by “paying-up” for companies when they were not forced to compete. When there is competition, who knows where the value can end up. Beauty is in the eye of the beholder…let buyers figure out who thinks you are the prettiest.
Competition amongst buyers, will not only get you what the company is really worth but will also allow you to choose the right acquirer which may not be the one offering the most cash. Surety of close is very important when tying a company up during the LOI process. No one wants to be left at the alter after a long engagement. And then there’s your managers and employees to consider. If keeping company traditions and your reputation in the local community is a consideration, having multiple offers will provide you the best leverage to negotiate terms that keep the things that are important to you in place.
Lastly, the status quo (i.e. “I’ll just keep my company”) is not a substitute for buyer competition. The average private equity firm will spend $100,000 just to make you an offer and over $1,000,000 in due diligence and legal fees by the time the transaction closes. They’re in the business to make money, not waste it chasing indecisive sellers. The seller who threatens to “keep his company” will only receive halfhearted offers from low ball bidders and will permanently taint his company with reputable buyers who were willing to pay more. Thus, make the commitment to sell before you offer your company up for sale.