A client recently asked for negotiation advice about selling his business.
He’s in his 40s and has been growing his business for about 15 years. He started as its marketing guru, progressed to an ownership share and took over its helm when its founders decided to become passive investors.
The company grew steadily for most of its existence, and recently hit a real growth spurt that shows promise of exponentially higher profits. This prompted the industry’s 800-pound gorillas to take notice, and a few initiated some preliminary sale conversations.
My client, sensing big dollar signs on the horizon, wanted advice. Here’s what I said.
1. Define your objective.
“What do you really want to do with the rest of your life, and why?” Retire? Spend more time with your kids or on the golf course? Find a new business challenge? Or would you miss running the business?
In short, figure out your real interests – business, personal, family, and financial.
And what do your wife and family really want, and why?
Then list and prioritize those interests. If you have then preliminarily concluded that selling your business might satisfy those interests, let’s move to Step 2.
2. Find options to satisfy your interests.
Selling a business can be incredibly complex or fairly simple. It depends largely on your and the potential buyers’ objectives and how much they overlap.
If you want cash and not future financial risk, don’t really care anymore about the business and plan to frolic on some Hawaiian beach, we’ll look to maximize your company’s current cash value. Then we’ll find entities with the resources and interest to swallow businesses whole.
Alternatively, if you foresee (a) a market where companies your size can’t effectively compete, (b) a desire to work in a larger organization, (c) regret if your customers don’t get top-notch care, and (d) a family need for substantial college resources in 10 years, then we’ll explore business options to satisfy these interests.
3. Design a sale process.
Next, we’ll devise a sales mechanism to match your interests and possible options with likely buyers. If one of your most important goals is financial, setting up a competitive auction environment will likely maximize your sale price.
In effect, you put your company on the auction block and invite bids from financial buyers (those looking primarily for an investment) and strategic buyers (those looking to build on their current business). Your financial value is what any qualified buyer will pay.
So first put together a professional sale package highlighting your company’s strengths. Then round up a host of potential buyers, do your due-diligence on them and let the competitive bidding begin.
An investment banking professional recently estimated that unilateral first offers averaged only 76 percent of ultimate purchase prices. A company he recently helped sell by auction received bids from $26 million to $105 million.
Alternatively, you might want to sell for cash, stock and a job to a synergistic company managed by a friend whom you respect and with a likely initial public offering on the horizon.
4. Close the deal.
Finally, analyze the strengths and weaknesses of your most serious potential purchasers and evaluate how their offers satisfy your prioritized list of interests. Then consider your alternatives, including not selling. Trust your instincts. If the deal feels right and matches your interests, do it.
My client ultimately took a walk. The result? He’s continued to grow the business. And he recently received another sale inquiry. This might be the one.
Published October 22, 1999 The Business Journal