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The following is the thoughts and analysis of Frank Williamson, the CEO of Oaklyn Consulting, a consulting firm that helps those with a business and/or nonprofits with a company’s sale, mergers, acquisitions, capital-raising, investor relations, succession, and other strategic corporate finance decisions.
Having a profitable business is no guarantee that you’ll one day be able to easily sell it. The pool of potential buyers for a business can vary widely depending on how unique your business’s products or services are and the specific profile of your business’s contracts, organization and ownership. Not only that, but wider conditions in the economy can affect the availability of capital in unexpected ways.
When a business has selective appeal in the market, a traditional “broad M&A auction process” isn’t necessarily a practical path to a successful sale. In my work as an investment banker for complex transactions, I instead often recommend to clients a highly customized process designed to reveal demand and pricing in a very thin market. That involves identifying prospective buyers or even a single ideal buyer, uncovering their motivations to do a deal and then making the business as appealing to them in as specific a way as possible.
This process is typically not a short one. It takes months at a minimum, and more advance planning than some might expect. But for sellers who finally connect with a buyer whose needs dovetail with theirs, it can be gratifying, not to mention financially rewarding, to go this route.
Here are some considerations for business owners to keep in mind when contemplating a potential sale of a niche business:
- Finding the ideal buyer for the future of your business, not its past
The generic way of expressing the sale price of a business is to describe it as a multiple of that business’s earnings from the previous year. But this isn’t the way to calculate it. For buyers who only can see what a business has accomplished in the past, its value might seem quite low. But when a buyer has the imagination to envision the possibilities of your business combined with their business, the potential future earnings of that combination might be much higher.
Maybe your business has a locked-in supply contract that has helped you thrive over time, but could be much more valuable to the buyer — perhaps by leveraging this relationship into a new set of customers they previously weren’t able to access. This makes your business scarce and valuable to them, which is what every seller wants.
For any business, chances are there’s one potential buyer out in the world who is more fired up than anyone else. The seller’s job is to invest sufficient time and imagination brainstorming, perhaps in cooperation with an advisor, to figure out who that buyer might be. Understand the competitive landscape and consider any business that is adjacent to you, whether you’re looking upward toward customers, downward toward suppliers, or side-to-side toward competitors and complementors. Anybody who wins when you win, or loses when you win, could be a potential buyer.
- Making your business seem scarce
Once you get a potential buyer fired up, you need to create some urgency for them — in other words, the opportunity to purchase your business can’t a forever option. Having other offers on the table is one way of accomplishing that, even if they’re not quite as enthused about the deal. Another way to drive the buyer’s interest is to be prepared not to do a deal at all.
If you feel you’ve found the one person who really wants to buy your business, it’s tempting to stop there and not explore any other options. However, doing that means that you have too little ability to walk away if the deal discussions don’t proceed as you hoped. In general, ignoring everybody else but your top prospect is unwise, since it leaves you without the ability to portray scarcity.
- Pricing on the basis of sharing future benefits
It can be helpful to proactively quantify for the buyer what a potential business combination could look like. You want them to have a sense that by doing something together, you can beat the competition sooner or more effectively.
Whenever a company sells for a surprisingly high multiple of its previous earnings, the common denominator is that there’s something about the future, rather than the past, driving that value. Usually, the purchase makes something possible for the buyer that they couldn’t accomplish on their own.
Maybe combining the two companies makes some internal cost-cutting possible, or creates a new cross-selling opportunity. Sometimes, the purchase puts the buying company over a threshold to sell for a high value themselves. Whatever the reason, somebody has to run the numbers, understand the return on investment and be confident that there’s untapped potential. Taking the opportunity to guide this analysis will open new ways to talk about value.
- Carefully understanding the buyer’s perspective
If your business does represent the missing piece of a puzzle for the buyer, they’re probably not going to tell you that outright. However, a buyer may be willing to communicate certain value goals that can be helpful in understanding the deal’s potential appeal to them. As the seller, you might be conditioned to focus on the value of your business, forgetting to ask why someone’s interested in you in the first place. The key is to ask that question, because understanding the buyer’s perspective can lead to a more open discussion about value.
If the biggest thing preventing you from moving forward with a particular buyer is that they don’t appear to have the cash to close a deal, consider this: You can accomplish a lot in addition to garnering cash at closing. Eventual sales start many ways, such as a joint venture arrangement. Also, don’t overlook that for the right deal, acquisition financing is not hard to come by. If a seller is potentially creating something bigger through the combination of their company and yours, that can be very attractive to investors.
Timing a deal that’s right for both sides
Most business owners have good intuition about the value of what they do. If you aren’t in a rush to sell your business and you’re comfortable with potentially walking away from a deal that’s not good enough, you have a great deal of bargaining power.
A recent client of our firm’s, a long-established and fast-growing company, is a good example of this strategy. The owner’s stance with private equity investors was that if the terms shifted, he would be happy to walk away. As it turned out, the terms did not shift during a multi-year negotiation, and the deal closed with the parties happy on both sides.
If you’re doing something that’s consistently valuable to your customers, then that group of customers and the service that you provide are probably also valuable to at least one other party. By being thoughtful and methodical as you consider prospects, then listening to them about their aspirations, together you might be able to find a way to help them grow naturally or do their work better. This kind of post-deal vision is what leads to the best at-closing outcomes when businesses sell.
About Frank Williamson
Frank Williamson is the founder of Oaklyn Consulting, a different kind of investment banking firm for small- and medium-sized companies under private ownership. Oaklyn plans and executes its clients’ most complex transactions, including mergers, acquisitions, capital-raising, recapitalizations, and lender and investor relations. Oaklyn supports businesses, investment firms, nonprofits, co-ops and partnerships. By working as consultants, not brokers, Oaklyn helps in situations where traditional investment bankers typically cannot.
