MA Advisor: How Can I Realize Maximum Price for My Business?
As a provider of merger and acquisition services to sellers of middle market companies, we spend a great deal of time preparing and strategizing about determining the right approach to ensure we achieve the maximum price for our clients’ businesses. Many factors play into this process, such as performing in-depth due diligence and tying up loose ends, preparing the company’s story and sales pitch, researching and identifying the best buyers, and very aggressive marketing and negotiation tactics.
One important element to achieving the highest price relates to the actual sales and marketing approach and the process used to create a competitive marketplace for the company. Unlike publicly traded companies for which there is an established market making it easy to buy/sell shares any time, there is no liquid market for private companies. Thus, we must create a market.
Why is creating a competitive market for the seller’s company so important?
Creating a competitive market puts pressure on potential buyers to offer their best deal. The seller maintains the leverage pitting buyers against one another in order to achieve a desirable outcome. Less aggressive buyers tend to fall away and the process whittles the list of potential candidates down to the serious buyers.
Building a competitive market allows the seller to simultaneously evaluate multiple bids, deal structures and potential buyers, putting him in a position of strength to decide which opportunity is best to pursue.
Building a competitive market allows the seller to view a broad range of possible offers. In a competitive bid situation, it is common for the differential from low to high bid to be more than 50%. Imagine how much money a seller could lose if he pursues only the low bidder in a non-competitive, direct negotiation? It is significant. How would the seller know if he is getting the highest price without running a transaction process that builds a competitive market?
Further, rarely do non-competitive, direct negotiations, especially ones based on unsolicited offers, result in the highest prices. The buyer knows it is the only party at the table and feels no pressure in putting forth its best offer.
Example Case Study
Here is an example showing the possible range of values received from four potential buyers for a private company. Although not from an actual deal, it is a representation based on a number of actual private company sales, which resulted in a similar disparity among values.
The differential between the high bid and low bid is almost 50%. What if you had NOT created a competitive market, and instead, engaged in a one-off negotiation with Buyer D only? If you close the deal, you have given up a lot of money. However, you would never know it!
You can see the auction process in action in the recent bidding war between Dell and Hewlett Packard for 3PAR, which significantly increased 3PAR’s value.
http://money.cnn.com/2010/08/27/technology/dell_3par/index.htm
In summary, just like many bidding situations in life, creating competition for a seller’s business is critical to achieving maximum price. Running a process that creates competition keeps the leverage in the seller’s hands.
