Thursday, January 30, 2014

How can I get the best price for my business?



This discussion is inevitable in any transaction. Both parties want the best deal. The reality is when a typical buyer and seller enter discussions the deal parameters are miles apart. The buyer wants the lowest price with the least amount of cash to close and best terms. The seller wants highest prices with highest amount of cash down and least amount of terms. 

Regardless of what side you’re on there is one market place reality that cannot be ignored: the potential anticipated short term upside for the seller can be overcome by the downside for the business going forward, even to the future damage to both parties. 

Acquisitions for mergers and bolt on companies can be a long term disaster if the price is too high i.e.: exceeds fair market value. We have witnessed a public company buyer pay an unusually high price for a business. The buyer was eager to complete a transaction for a number of reasons and the idea of the acquisition seemed to excite the board. The company’s leadership was all over the idea of rapidly growing the shareholder value to generate some great returns. 

The buyer steamrolled through the offer to purchase and sale agreement process. The momentum of the excitement of a deal overshadowed the deliberate weighing out of the pros and cons of how to make the two companies strategically fit. The quick rationalizing of this or that synergy and guessing about how the upside creation of increased value was all opinions instead research facts. As the purchase and sale agreement moved towards final draft a due diligence process was completed driven by financial performance only. The due diligence did not model to verify what each party only anticipated as operational synergies. 

In meantime the business owner was already focused on how to invest and enjoy spending the anticipated pay day of a life time. The buyers were promoting to close friends of the pending uptick in share values and share trades were beefing up.  The vendor took his eye off the ball and missed out on a few key projects where they should have won the work. The buyers were pounding the streets for investors and funding eventually exhausting the typical channels and landing in the mezzanine shark tank. Every day the business declined in momentum the spread between the offer price and valuation driven offer grew. The funders were not blinded by the emotional momentum of the buyer and the seller. In almost no time at all funders were backing out, failure to complete penalties were being demanded, even the people buying stock were bailing as delay after delay had to be announced.

The deal was signed, the funders were finally committed but funds were not released. The meeting was arranged as the final chance for all to save the deal, but it couldn’t be saved. The vendor’s revenues had dropped 40% in 6 months. The stocks in the public company had spiked 25% but after all the delays were down 50%. The funders withdrew and basically said “so sue me”. The buyer board and lawyers negotiated to pay out all damages and break fees. The president who was the champion of the deal was quietly removed from any decision making. Three years later the vendor is one quarter of their past size, the public company is a penny stock. Everyone lost. From the outside looking in we feel very strongly this transaction would have closed had the deal been fair. 

Moral: Free enterprise transactions involve many perspectives. The only transaction that is sustainable has to be fair to both the buyer and the seller… and the stakeholders. Invest the time and energy to develop a defensible and realistic understanding of the transaction values. Enter the transaction knowing full well it has to work for both sides or it is not going to survive.