*The content of this article is based on our past collective experience and academic research we have undertaken on this topic.
Knowing how to negotiate a premium from the sale of a business should not be approached haphazardly. Here is a simple example. I have an acquaintance who recently sold his oxygen-supply tank business to a strategic buyer.
During the sales process he was in negotiations with a company pursuing a roll up strategy of Medicare-funded oxygen supply businesses. They came to him with a pretty good offer and frankly one I would have advised him to take. However, he played the let’s make a deal game and asked for $1.5 million more and they told him, “we’ll consider it and get back to you.”
They called him back eight days later (after spending several sleepless nights wondering if he had spoken out of turn and killed the deal) and accepted his counter offer. His casual approach had earned him an additional windfall with little forethought, however unfortunately, seldom is the process that easy. There are, however, a few strategies that can help boost your company’s value prior to an M&A transaction.
A known valuation-booster for any business is to show increased sales over the prior trailing twelve month period. Businesses with double-digit sales increases can attract a premium on their purchase price as they are perceived to be in growth mode. Concentrating on landing new clients and upselling existing clients will help in regaining a focus on sales and driving more business. Growing your top and bottom line prior to a transaction can make your business more attractive to buyers, resulting in an increase in the purchase price offers received.
Ensuring your books are up to date and void of questionable practices will prevent interested buyers from using them against you during a sale. Misrepresentations can be considered fraud and you can be held legally liable if a buyer relies on them in making an offer. For instance, we were involved in a transaction with a company who employed “off the books” labor, however the deal imploded at the 11th hour when it became known the seller had under reported wages. Be honest and forthcoming and you will not only sleep better at night, but it could mean a big difference when you reach your liquidity event.
It is understandable why acquirers seek out businesses with higher gross margins, creating an opportunity for seller’s looking to get the most out of a divestiture. There are several strategies one can undertake to decrease cost of goods sold including renegotiating lower rates with suppliers, buying in bulk to receive discounts, substituting lower cost materials if and where possible, automation of production, and moving operations offshore. Eliminating unnecessary expenses and running a lean and efficient operation will not only help boost your bottom line but also make your business stick out and be perceived as more valuable by would be investors.
A strategic acquirer is someone who operates in the same industry or vertical and is interested in buying a competing business to capture synergies and economies of scale. Your company will be better valued if you are acquired by a strategic who can leverage your business to remove operational redundancies, lower expenses and cross sell their products and services to your existing customers. Strategic acquirers are usually the first place an investment banker will want to do some initial reach-out to gauge the level of interest in the sale of your the company.
Boosting business value can also be accomplished by creating a bidding war between multiple interested parties. Bidding wars occur when an organized and methodical broad auction process takes place in order to attract the greatest number of acquirers for your business. This is accomplished by sticking to a disciplined and explicit time table to include: initial marketing outreach, fielding discussions with interested parties, setting a date for accepting LOI’s, negotiating deal terms, and closing a transaction, which pushes buyers to put forth their best offer if they are sincerely interested in getting a deal done.