How Competitive Tension will Help You get the Best Price for Your Business
May 13, 2015
It’s not uncommon for a business owner to call us after they’ve been approached by a competitor or financial investor to sell their business. The engagement generally starts in one of two ways.
The client and potential purchaser have already signed a Letter of Intent (LOI). While the LOI is generally not legally binding, it often lays out the terms of the deal, which become difficult to change. Our role here is to ensure the deal closes in an efficient manner and in accordance with the vendor’s expectations.
There is no LOI and the client has had a few meetings or preliminary discussions on the transaction. In this case, we try to help the client negotiate the highest price and best terms without going to market.
In the second scenario, the potential purchaser is almost never happy to hear we’re involved. They know we are going to advocate on behalf of the client and create an environment where they may have to offer more than they would otherwise.
Our challenge is to add an element of competitive tension where there are no apparent competitors. By competitive tension I mean that the purchaser has to believe that if they don’t put their best offer forward they won’t get the deal. The best way to do that is to make it true.
Here are some points to consider:
Let your advisor be the point person. All communication and correspondence should pass through them. You will ultimately control the process from behind the scenes, but consider the other party’s position and listen to advice from your advisors. This gives you flexibility.
Don’t be afraid to create competitive tension. Some purchasers loudly claim they won’t be involved in an auction and will walk from the deal if they are forced to compete. I say this is rarely true. Having said that, if you manage the process tightly, you can agree to work exclusively with the potential purchaser within a controlled timeframe.
Know the marketplace. While we will never know the true market price without putting the deal out to market, you can do enough research and analysis to get a pretty good understanding of what a good outcome might look like.
Prepare like you are going to market. Ensure that all your assertions and financial results can be supported by data. If you are prepared, it will be easier to walk away from the deal and you can consider going to market later.
Be realistic on what a good outcome might be. Be willing and able to walk away from the deal if the purchase won’t or can’t meet your expectations. This can be harder than you might think.
Terms and conditions of the sale are equally important as the price. Consider them seriously and take the good advice of your lawyer and advisor. Nothing is worse than making a deal and later finding out you’re not getting all the money or, even worse, have to give some back.
Hire a lawyer that specializes in divestiture transactions. You don’t use your family doctor to perform life saving heart surgery. So don’t use your business lawyer to do the deal unless he has the experience. Yes, good lawyers are expensive, that is because they are worth it.
In summary, if the process looks and feels like an auction, the purchaser is more likely to treat it as if it is an auction.