Valtrend's M&A Philosophy:
Selling A Business For Its Maximum Value - A Refreshingly Different Approach
Mergers & Acquisitions: Introduction
Most business owners lack information and instruction on the subject of selling their private company. Importantly, they also lack the time to devote to such a process. Many business owners, therefore, engage business brokers to sell their company.
Traditional approaches to selling companies, however, involve shockingly low levels of success. Typically, a business broker expects the business owner to find a potential purchaser. This dependence relieves the business broker of actively and intimately marketing and selling the company. The broker merely has to concentrate on the technicalities of the sale. It is no small wonder that less than eight percent of companies on the market are actually sold - much less sold for top-dollar.
Why do so many companies fail to sell? The Traditional Approach to Selling a Private Company
There is a certain mystique to selling companies that is undeserved. The reality is that the process of selling a company departs only marginally from the process of selling other products and services.
The traditional approach begins with the formation of a “prospectus” or “sales memorandum” which is typically 70-80 pages of very detailed information. Although perhaps professional and well constructed, this prospectus will almost always be the wrong tool for the job. A typical prospectus reveals far too much information much too early and nearly always fails to address the most important issue – expected future benefits to the buyer. Such a document is designed to sell a company and yet is usually devoid of the material information the buyer needs to make a well-informed decision. A good prospectus should never be designed to sell a company; but rather to “sell a meeting” and no more – a meeting to consider future negotiations. The average prospectus is feature-rich, but devoid of crucial information.
Typically, an intern or junior member of the staff is now given the administrative task of mailing the prospectus to a number of competitors, despite the fact that the best buyer may be complementary rather than competitive. This strategy is usually followed with little to no response. The prospectus is passed on by various industry contacts with the hope that somebody somewhere may know of a buyer who is looking for such a deal. It’s little wonder that so few companies actually sell with such a sterile approach.
As a last resort the company’s details are advertised or placed on the broker’s web site…along with every other company the broker has for sale. As we all know, this list can be intimidating. With all the companies for sale on the various brokerage websites, it is easy to wonder how much individual attention, if any, each company gets in pursuit of the best buyer. At this point, the typical broker may just be “looking” for any buyer as he or she continues to add “companies for sale” to the website list. Moreover, some subscribers to brokers’ lists may well be among the worst buyers. They tend to be private equity funds looking for a short-term return on investment (ROI). They also do not (generally) pay for synergistic or strategic benefits.
The problem is simple; most selling principles adhered to when promoting products and services are abandoned when selling private companies.
Cutting Across Traditional Methodology: “A Refreshingly Different Approach” to Selling Your Company
Changes in the traditional thinking are essential to improve the miserable “success” rate. The Valtrend M&A proactive marketing cuts right across the fundamentally passive approach employed by most other intermediaries. Most owners of private companies recognize that they will only achieve the best price and acceptable terms if they are dealing with the most appropriate buyer. Valtrend will actively search and connect the best buyer with the company. We will not be passive. We recognize that negotiations are far easier when dealing with the right buyer. Moreover, we only take on a few companies at any one time. We want to make sure that we have the time and attention to devote to selling your company – rather than merely listing your company for sale. In summary, selling a business is every bit as much, if not more, a selling/marketing matter than it is merely an accounting, finance or legal matter (the technicalities of the sale).
Of course, the technicalities are also important…just not so important that the art of selling your company is abandoned. When the technicalities need to be addressed, Valtrend employees are as qualified as any given our finance and valuation qualifications.
Whether your objective is to liberate your time, reinvest in a new venture, or access family wealth, your goals must be considered carefully if the deal is to be constructed appropriately. Please see Valtrend’s detailed selling approach below.
Key Factors that Influence a Successful Business Sale
Misaligned thinking and action (or inaction) at early stages of the process can result in failure. Business owners must be determined to address the following four issues in order to facilitate a successful outcome.
1. Proactive Marketing
As previously stated, selling a business is primarily a selling issue. The best purchasers (who may pay a premium) are often not even considering an acquisition. Buying a company may not be on their agenda. The only way to find such a buyer is though a proactive search. On the other hand, some other potential acquirers are always on the hunt, but rarely pay a premium. Passive selling only reveals this less attractive type buyer.
Successfully selling products involves active inquiry generation. Why should selling a business be any different? At Valtrend, we utilize a number of comprehensive databases with potentially multiple thousands of companies at our reach. Using this information, we actively contact 100-200 prospective buyers just to locate two to five suitable ones. There is no short cut.
It is also highly beneficial to think laterally – to look beyond the obvious. For example, consider the sale of a company specializing in the installation of portable office and industrial partitioning. Traditionally, the focus for potential acquirers would be with large competitive partitioning companies. However, it would be well advised to broaden one’s horizons.
Success involves a far greater amount of lateral thinking. In this example, our partitioning company sells to building contractors, local authorities and architects. The question to ask is:
“What other products and services do these companies purchase?”
These complementary products would include, for example, suspended ceilings, raised access flooring, lighting, building control systems, access control systems, industrial flooring, fire alarms, structured voice and data cabling and HVAC system to name a few. Thus, these companies serve as outstanding potential inquiries to generate interest in our office and industrial partitioning company.
2. Bidder Competition
The single most important issue that a seller must strive for is having a choice of buyers – in effect, “creating a market”.
To obtain top dollar, not only must you find multiple interested buyers, but you also must find multiple strategically motivated, financially strong buyers. It is essential that this matter not be compromised.
3. Proper Valuation
Most “business valuations” performed by business brokers are primarily related to the historic profitability of the business. Moreover, many business brokers apply a “Rule of Thumb” to placing a multiple on a company. We have all heard of the ubiquitous 4 times EBITDA, or some other metric.
We have a problem with this simplistic mindset for the following reasons:
Whose thumb? Why do all companies in the same industry get the same thumb or multiple? Certainly, some companies in the industry are “stars” while others are “dogs”. Why do the stars and the dogs get the same multiple of earnings? It makes no sense! If your company is a star, you do not want a dog as multiple!
Moreover, historic earnings may not be an accurate prediction of the future. Valuation is all about the future. The company may have an enviable blue–chip client base and recognized brand name that, unfortunately, it has not been able to utilize to its full advantage in the current difficult economic times.
4. Good Preparation
Somebody controls every negotiation. If it is not seller, then by default, it is the buyer. The factor that gives the seller greatest control over the negotiation is having a choice of buyers. Of course, being well prepared for the coming negotiations is also always vital.
“If you don’t control the negotiation, the buyer will”
Key areas of preparation that we lead our clients through include:
Confidentiality: There are many ways to protect confidentiality, an issue that must be considered early on in the process. When do you tell staff? What do you say to them? Valtrend can help you through the process.
Documentation: At Valtrend, we guide our clients with a checklist of required documents and information. The critical documents are the brief, the sales memorandum, the step change business plan and the schedule of benefits.
First Impressions: As the saying goes, you only get one chance at a first impression. Make it count because it can be of disproportional importance. Consider your staff. Do they deal with customers and prospects in a polite and professional manner? A buyer may well call in with a fictitious inquiry in order to get a feel for the company’s customer service.
Objectives: Why do you want to sell? What are your price aspirations? When do you want to sell? All of these issues will influence the type of buyer that is approached and the nature of the deal. Each sale will need to constructed to meet your specific objectives in the most tax efficient way. If your objectives are unclear, then your planning will surely miss the mark.
Negotiation Training: Almost every Valtrend client will choose to endure our infamous “dry run” meeting. In this practice negotiation, we will identify and prepare for all difficult questions and negotiating traps.
The Five-Step Valtrend Process
1. The Project Brief
The Valtrend team will meet with the client to complete a detailed and confidential brief, covering all aspects of the company and a prospective buyer profile. We always think laterally and beyond the obvious. The brief is an internal document from which we draw all the information to take the company to market.
2. Exhaustive Research
Valtrend will rely upon a number of databases to identify prospective purchasers. The nature of many buyers can be a surprise to many sellers. On average, we initially identify over 100 prospective purchasers for each client’s business before we take it to market.
3. Prospect Generation
Valtrend will confidentially contact the CEO/Owner of every viable prospect identified in the research stage. The purpose of this first contact is to introduce the idea of an acquisition to each prospective buyer. The client company will not be revealed at this time, but rather we will disclose some key characteristics of the company in order to highlight the unique synergies that would benefit the prospect in an acquisition. Unlike traditional methods, the goal of this first contact is to sell a meeting- not the company. There are no valuation discussions at this stage.
4. Qualification and Bidding
Based on the information gathered, we find that 100 prospective buyers will typically be filtered down to eventually two to five strong candidates.
It is very easy to hand over all the information to the prospective buyers early in the process. Valtrend avoids this; we maintain control. We begin by trading information with the prospective buyers. We ask questions and slowly feed the prospective purchasers more benefits/synergies that the company can offer a strategic acquirer.
Most sellers that we represent tend to be entrepreneurial, which is not surprising, given that they are generally self-made. More often than not, the top person in the acquiring company is usually also quite entrepreneurial as well. It’s important to note because most entrepreneurs tend to be driven by the “feel” of the deal.
Business owners must ask themselves if they could “work with” the buyers – either in negotiations and/or as an employee after the deal is sealed.
The following is our recommendation for the competitive bid.
a. Each prospect will need to be informed that they are one of several companies with whom we are in discussions, so their bid will need to be competitive.
b. Be open-minded regarding the eventual deal structure. Generally speaking, the more flexible a seller is about the deal structure, the more the business will sell for because it reduces the buyer’s perceived risk. For example, if a seller is prepared to receive 80% of the proceeds on completion of the deal and 20% in one or two years linked to some performance criteria in an earn-out, then he or she has reduced the buyer’s risk. This may increase the overall consideration.
c. Valtrend will facilitate and lead every meeting and take each prospect through a proven bidding process.
5. Concluding the Deal
Valtrend will continue to coordinate the process, organizing and facilitating meetings between buyer and seller and their respective lawyers and financial advisors. Valtrend will coordinate the due diligence process to ensure that the seller and buyer have a meeting of the minds – so both understand what they are agreeing to. Valtrend will remain on the seller’s side so that our client gets the best deal possible.
It can be an emotional process and you might only get one chance to sell your business. Make sure you use a proven process.
Serving Business Buyers –The Business Buyer Advocacy Competitive Advantage
Without an advocate, most buyers cannot access the “hidden” market. This is where up to 80% of businesses - especially the best ones - are for sale. Most of these owners do not advertise their business for sale, nor do they admit they are for sale to buyers they don’t know. We can introduce you to these sellers.
Valtrend can also help business buyers in the process and ensure that you are not being taken advantage of. The skill set required to sell companies is the same as the skill set required to buy companies. We will leave no stone unturned in finding the best fit for your personal skill set and goals. We will work with you as you require in your search and in a way that makes sense for you – whether that be on a monthly retainer basis, a fixed-fee or on a project-based hourly assignment. We will bring our negotiation skills as well as our wealth of financial/valuation experience/education to the proverbial table. In summary, you will only pay what the right company is worth.
Please contact Valtrend via e-mail or call us at 208-859-0620 for a free confidential consultation.