How much is my business worth? I am always asked that question when meeting with business owners for the first time who are looking to sell. That of course, depends on a variety of factors like profits, sales, assets, EBITDA (earnings before interest, taxes, depreciation and amortization) and other business valuation metrics. However, a surprisingly important factor when selling your business is how you position it in the market. The marketplace is surprisingly opaque and the ultimate market value of your business will be subjectively determined by the potential buyers. Let’s be clear if you do not have negotiating leverage you will lose.
The way to achieve the maximum value from the sale of your company is to get several strategic buyers all competing in a soft auction process. That is something every business owner hopes to have happen when selling, and let’s take a quick look at the other exit or value options to better understand why this is important to maximize the value during the business sale process.
Liquidation Value: This can be one of the toughest ways for a business to exit, especially if they have been operating for decades because it is only a hard sale of the assets of the business, and doesn’t include any value given for brand name, goodwill, employees, customer lists, or earnings capability.
Book Value: An accounting term for the physical assets that a business has, and usually not even close to the true value because it only accounts for the depreciated value of the assets. It doesn’t include such things as earnings power, proprietary technology, competitive advantage, growth rate and many other important factors. A much better approach to use in this case would be a multiple of sales or EBITDA, which better represents the cash flow generated from operations of a business.
Unsolicited Offer to Buy: This usually means that a buyer is looking to buy the target company for a bargain price. If the unsuspecting seller bites on an LOI or makes a weak counter offer before understanding the true market value, retaining an intermediary, developing interest from multiple buyers, the buyer could get a very good deal indeed. The above scenario happens with an astounding frequency as they say “penny wise and pound foolish”. Why else do you think you receive so many unsolicited offers to buy your business?
Another tactic often used by professional buyers is to propose a reasonable offer in a qualified letter of intent (LOI), and embark on a lengthy due diligence process. During the process the buyer will find every little flaw in the target company to help uncover ways to decrease their original purchase offer while wearing down the seller into accepting a significantly lower offer. I personally know of a Canadian information technology CEO that received an LOI for $6 million, and sold for $1 million a year later.
Buyer Referred by Seller’s Professional Advisors: This is a common approach when exiting, but doesn’t do much to maximize the full seller’s transaction value since the introduction often results in the bidding process of only one buyer. The seller tells their banker, financial advisor, accountant, or attorney that they are considering selling, and the advisor may ‘know of a client in the same business” that they can introduce. Because there is only one buyer being generated they have no motivation to offer anything but a discounted price for the business.
As you can see, the price received when you sell your business can vary greatly depending on the preparation, process, intermediary and positioning with buyers, and the decisions that you make when selling can result in 20%, 40%, or even 100% differences in your sale proceeds. A good intermediary will explore and help identify strategic fits that create a significant boost in value. Always remember, “the quality of your exit plan can create as much value as the last 10 years of operating the business created.”
Multiple Strategic Buyers in a Bidding Process: The ultimate way to maximize transaction value for business sellers is to have several buyers that are actively interested in purchasing the company. Edison Avenue understands the importance of creating that kind of market dynamic for its clients, and positioning the seller as a strategic target, so other industry players are more likely to step up with aggressive offers in order to protect or gain market share.
It is important for a business brokerage M&A firm to take the time to understand your business and identify the ways to best strategically position your company to generate higher offers and ideally from multiple buyers. The article was written by Edward Valaitis the Managing Partner.
Edison Avenue has a highly experienced team that specializes in selling businesses for the maximized price & terms. Edison Avenue is the first choice business brokerage M&A firm when selling companies with revenues up to $25 million, leading both “sell-side and “buy-side” engagements.