Selling a Business: Tricks of the Trade
At Allegiance, we are very good at getting premium prices for our sellers and successfully closing transactions for our buyers. Our secret is educating the seller (whether we are representing the seller or not) on how to get a better offer (price and terms). The better the offer the seller gets, the more likely the seller will accept and a transaction will close. I would like to share a couple of those tricks which are less intuitive.
Don’t give a buyer a price
Most sellers think that if they set a high figure they will get more, but in my experience, it only hurts the seller. Offering a price only:
- sets the maximum value the seller could receive
- turns off high quality buyers if it is too high
- turns on low quality buyers if it is too low
None of the outcomes is good for the seller resulting in lower offers. A seller can try to justify a price by saying, “if they pay my price, I’ll sell.” Buyers know it’s a negotiation tactic. If the figure is low, the low quality buyers will try to “steal” the company. If it is too high, the high quality buyers (who pay the most) will walk away.
The best advice…just don’t do it.
Make buyers compete
How does a seller get a better offer if he doesn’t give a price (as suggested above)? Make buyers compete with each other. Effective competition between buyers will get you what the company is worth…and more.
There is no substitute for buyer competition. A seller cannot talk an individual buyer into over-paying. Buyers 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.
Make a commitment to sell before negotiating
If you think you would like to sell or you receive an offer for your company, make the commitment to sell before you enter into any further discussions.
Rather than create real competition, sellers try to bargain using the status quo (i.e. “I’ll just keep my company”). The status quo strategy is a huge value killer. The average buyer will spend $100,000 to make an offer and over $1,000,000 to close the transaction. If there is any risk of the seller “taking his ball and going home,” the best buyers will not spend the money leaving only half baked offers from low ball bidders. This strategy tends to permanently taint the seller’s company with the best buyer, hurting its long run value too. Thus, make the commitment to sell before you enter any negotiating.
Closely related is the “everything is for sale for a price” strategy. This is really a non-committal strategy that has all the same issues mentioned in the previous paragraph.
Don’t ask for a price early
Value is tied to risk, so the less a buyer knows about a company, the less a buyer will offer for a company. In addition to educating the buyer about a company, a seller wants to communicate that the buyer has competition and that the seller will sell. The more the buyer knows about the company, competition, and likelihood to close, the higher his initial offer will be.
Too often sellers ask for a figure too early thinking, “I don’t want to waste my time if the offer isn’t good.” The only way to get a good offer is to make the commitment to sell. The wasting of time is in asking for the figure early.
If you receive an offer from a buyer, use it as an opening bid in an auction process, or just say no thank you. Don’t ask for a number because it will anchor the best bidder (one motivated to approached the potential seller) to a low number.