The Business Sale Process: Private Auction vs. Negotiated Sale

More Analysis Required

Recapitalize Your Company. For and Against

Making Sense of the Letter of Intent

Critical Pre-Sale Due Diligence - Maximize Business Sale Price and Terms

7 Challenges of Selling a Privately-Owned Business

M&A Data - Making Sense of the Conflicting Reports

Supply and Demand – Maximize Sale Price

Selling Your Company in 2010? More Analysis Is Required

If you’re going to sell your company in 2010, you need to think differently. Yes, there are buyers lined up with cash right now, but most are either looking for a high growth company that has been bucking the negative economic trend, or they’re looking for a stressed balance sheet and shaky capital structure to pick up a “good deal.”

For companies that are somewhere in the middle, you need to be better prepared than ever before. Buyers are going to be more critical and more likely to submit a low purchase offer unless they have a real understanding of your business. To submit a fair value purchase offer, they need to be convinced of the opportunity.

You need to have clear data and analysis of your business, systems and processes before you talk to any prospective buyers. This is in addition, to the more obvious steps of highlighting competitive strengths, weaknesses, business outlook, opportunities and benchmarking. Clear means well documented and easily understandable to an independent person who has no prior knowledge of your business. Why is this data and analysis so important? Because when a buyer makes an offer to invest in your business, they should be well informed and understand the business with an insider’s knowledge. If that happens, they feel less uncertainty. Less uncertainty = less perceived risk = higher purchase price.

To illustrate this point, it is useful to consider some of the differences between the equity valuation of a public company and a private company.

Public vs Private Company Valuation

Investors in public companies have easier access to more reliable and timely information, data and analysis than investors in closely held private companies. Why is this data and analysis so important? Because when a buyer invests in a public company, they are informed with research from thousands of analysts from many different perspectives. As a result, there is less uncertainty risk. At the time of writing this article, the average PE ratio for the S&P 500 was 20 compared to an average 5.2 adjusted EBITDA multiple for middle market private companies, according to a recent AM&AA report.

Yes, there are other factors to consider when comparing public to private valuation, such as stability and liquidity, but the bottom line is that investors will pay a significant premium for “ABC Manufacturing” public company than the comparable “XYZ Manufacturing” closely held private company. The price premium can be double, triple or more. Therefore, unless the buyer of XYZ Manufacturing has a deep insight into the business before they make an offer, they’re going to price in their uncertainty with a lower multiple.

Better Analysis = Higher Sale Price

Let’s be realistic. A private company is rarely ever going to sell for a public company multiple, but just bridging some of this information gap and shifting 10 or 20 percentage points towards a higher multiple can mean millions of dollars to you.

So, what can be done to bridge this gap? If you look at the typical closing process when you buy a closely held company, there is a boilerplate due diligence list. And due diligence nearly always begins after the sale price has been negotiated and the letter of intent has been executed.

If you’re the seller, this is counterintuitive. If you want a buyer to stretch and pay maximum price for your business, they need to be fully informed when making an offer. After signing a letter of intent, they only have two real options. They either buy your business for somewhere close to the negotiated sale price or walk away. Yes, a buyer will often use due diligence to try and negotiate lower, but the majority of negotiations are already complete by that point.

It has been proven to us time and again that it is better to lose a buyer earlier in the process than have them make an uninformed low ball purchase offer.

You should spend time preparing insightful analysis of your company before negotiating with a buyer. It is natural to want to get a feel for the market value of your business before spending too much time, but by moving forward too quickly, you will lose negotiating strength and are unlikely to ever find out what the market could really pay.

So, what analysis do you need to perform? Well, we can’t give away our proprietary process, but it comes from the experience of the buyer’s perspective and seller’s perspective from countless acquisitions. It also depends on the size, type and complexity of the business. One thing is for sure, however. When a ClearRidge client brings a company to market, prospective buyers will have access to relevant, concise and convincing analysis, so their offer is going to be based on a much clearer understanding of the business. You will lose some buyers in the process, but you’ll also sort through to find motivated prospects who are more likely to meet your price expectations.

Recapitalize Your Company. For and Against.

Recapitalization is the financial reorganization of a company's debt and equity mix.  The aim is to improve a firm's capital structure. Essentially, the process involves the exchange of one form of debt or equity for another.

FOR RECAPITALIZATION

Stabilizing the Corporate Capital Structure

In distressed situations, a recapitalization can stabilize your firm's capital structure and cash position. This can be achieved by renegotiating terms with lenders by trading existing debt for new debt with lower interest rates or longer maturity; or by simply exchanging debt for common stock.

Providing Liquidity

By raising debt or equity a company consequently increases its liquidity that may be needed to finance further investments, or even an owner's partial or full exit.

Partial Sale of Your Company

A recapitalization gives you the possibility of taking cash out of the business, by selling a minority or majority stake in your company.  In particular, owners may consider this option a few years ahead of retirement.

You can earn a pay day today, along with another pay day in a few years time after new investors have hopefully grown the company and increased the value of your retained equity stake. As an owner, you get to take cash off the table, reduce your risk and diversify your investments.  An owner would typically be tied to a management position in the company for a period of time.

Bringing in a Capable Partner

In an equity recapitalization, you benefit from the strength of a new owner. It is important to take time to identify the right investor to partner with. You should investigate their previous experience, track record, credibility, motivation and financial stability.

If both parties share the same vision for the future growth of your company, you can benefit from the new equity investors' broad range of operational and strategic experience, as well as their investment dollars.

Increasing Management Discipline

Increasing your company's debt leverage often has a disciplining effect on management as a result of the financial and operational restrictions involved. This discipline can trigger more thorough financial analysis before major decisions.

AGAINST RECAPITALIZATION

Operational and Financial Restrictions

If you choose to raise debt rather than equity, it will bind your company to financial covenants in the credit agreement and place restrictions on investments and distributions to owners imposed by the lenders. Furthermore, costs increase as lenders charge monitoring and maintenance fees on the loan.

Loss of Control

New equity investors (even minority investors) are going to be involved in important strategic and financial decisions.  Owners can become frustrated with the direction of new investors. As part of your due diligence, you may even want to talk to other entrepreneurs who have partnered with your new investors or sold companies to them in the past.

Loss of Strategic Focus

In some cases, new equity investors will focus almost entirely on the financial performance of the business.  Often, they have limited partners in their equity fund, who expect a minimum rate of return on their investment. On the plus side, their focus on financial rewards should lead to a great second pay day in a few years. On the downside, you may feel that you are abandoning the way you have successfully run your business over many years.

In summary

Recapitalizations are a great tool and often provide the dream exit for a business owner. However, it is a lengthy and time-consuming process, so you may be well served by seeking advice from professionals who have been through the recapitalization process countless times before.
 

Making Sense of the Letter of Intent

We first explain what can be included in an LOI, then go into the standard requirements and suggested best practices further down the page.

An Letter of Intent is often misunderstood in the sale process of a company.

The purpose of an LOI is to establish a general framework for the price and key terms of a potential transaction.

An LOI would often be executed following a verbal offer of price and terms from a buyer prospect and would be executed before due diligence starts.

While an LOI resembles a written contract, they are typically non-binding on the parties in their entirety.  You could think of it as a letter of understanding to continue the process.

It is important to make sure that a potential buyer submits
an LOI before allowing them to start the due diligence process. The main reason is to ensure that you have a general understanding and agreement with the terms of their offer.

There is no sense in stalling the sale process for 90 days and giving exclusivity to negotiate contract terms with only one buyer if their terms are not going to be acceptable to you.

Why you should request an LOI

The act of submitting an LOI requires higher level approval and signature, which indicates that it is a serious offer and that the buyer representative has the appropriate authority.  At the same time, the buyer is not committed to deliver those terms and is not committed to complete the transaction.

When both sides are acting in good faith, an LOI sets up the outline of an offer and allows you to contemplate whether you want to open up your company to an exclusive period of due diligence where the buyer prospect would gain complete access to your company's financials and operations.

When sellers don't request an LOI

In an informal sales process where both parties know each other well, some sellers feel that they can gauge both the motivation and indicative terms without requesting an LOI from the buyer.  We believe these situations make it even more important to require an LOI.

LOI Content

The basic provisions of an LOI typically include details of the deal structure, its terms and conditions, exclusivity and obligations of the parties. The financial terms comprise the price and terms of the deal, which may include cash, stock, earn out, warrants, options, minority or majority ownership.  It should also include an overview of financing sources and leverage for the deal.

It will often also set out a general timeline of when the agreement and contract would be finalized if due diligence is completed to the buyer prospect's satisfaction.

Nonbinding Nature

Even though LOIs are considered serious agreements, many of the most important parts of the agreement are not binding. Often the only binding provision is the non-disclosure or "no-shop" provision.

Exclusivity Agreements

In consideration for the time, effort and money spent by the potential buyer during the due diligence process, exclusivity agreements are standard.  The seller agrees not to market the business to other interested parties which as a consequence provides the buyer with some sort of security against competing offers. Different terms essentially all mean the same: "no-shop", "stand-still" etc.

Unfortunately for the seller, if the deal falls through after the due diligence stage, it inevitably means a loss of momentum in the sale process.  This is why it is so important to have a clear understanding of a buyer's track record, financial means and motivation to complete the deal in a timely manner, as well as have some other buyer prospects in reserve if the current buyer falls through.  Without that assurance, many sellers tie themselves into "no-shop" agreements with buyer prospects that talk a good game, but are unlikely to ever get to the finish line.

Reliable Financial Data

Even though an LOI is a significant step towards the sale of your business, it is just the first step in negotiations.  As price and terms of the LOI are not binding, this is when the work really begins to provide accurate and reliable data in a timely manner.  If you have an acceptable buyer prospect, you need to increase their confidence in your company by pre-empting their due diligence requests with thorough preparation and a secure data room available to them with information they are likely to request.

And a final note. If a buyer requires you to disclose sales forecasts before the LOI is signed, make sure that they are reasonable. If you are too optimistic, the buyer will often use your non-achievement of the forecasts as leverage to renegotiate the purchase price, worsen the terms or both.

Critical Pre-Sale Due Diligence - Maximize Business Sale Price and Terms

Due Diligence preparation is often overlooked, yet is critical to maximizing sale price and ensuring a smooth transaction. Now more than ever.

Credit markets are tight and despite a recent rebound, Mergers and Acquisitions activity is still down.

Buyers are targeting acquisitions - but now with a heightened degree of scrutiny.

Even if a buyer has plentiful cash available, they are still likely to leverage the acquisition to increase their percentage returns.

Leverage brings lenders to the table. Even if lenders are familiar with the deal, they need to provide detailed support for their loan.

With the tighter credit environment, tougher reporting requirements and more stringent data and due diligence requirements, you need to do more today to ensure a smooth sale process.

A report on your company's financial results from your accountant or even an independent auditor is not sufficient.

Your best option is to conduct in-depth analysis of your Company by an independent due diligence expert to identify areas that will have a direct impact on the sale price.

Firstly, a buyer needs a thorough review of your financial accounts and reported financials with supporting detail, consolidated data as well as data by location, product categories and other relevant categories for historical and forecasted periods.

They also need in depth analysis and a report on the quality of earnings, accounting systems, methodologies and compliance with or departures from GAAP.  They need to see normalized sales, gross margin, and operating expenses, as well as feedback regarding compliance with debt instruments.  They need analysis on AR, Inventory, CAPEX, working capital, debt and coverage, and profitability.

Buyers will also require due diligence on liabilities, operations, tax compliance, legal issues, reputation, industry analysis and forecasts, competition, customers, suppliers, people, PP&E, integration risks, environmental, health, internal controls, lease, zoning and permits, in addition to other business issues.

CLICK HERE for ClearRidge Capital's website section with expanded information on due diligence requirements.

This is not something that is easy to compile and typically requires strong financial modeling skills, trained analytical skills and specific acquisition due diligence and corporate finance experience.

Whether it is a midsized privately held company or a single division of a large public company, it is rare that this data is tracked routinely by the lean accounting staff that is focused on daily operations and normal reporting needs.

Take Action to Better Position your Company

This doesn't need to be an obstacle to a successful sale, but it does take planning and clear forethought.  Most sellers proceed too quickly at the start of the process and skip critical steps, only to suffer later on while attempting to close the deal.

Unfortunately for many sellers, starting later in the sale process can reduce the sale price or cause the deal to fall apart.

Your best solution is to prepare a thorough due-diligence report before talking to buyers.  Proactively offering answers to their likely information requests not only speeds up the process, but also inspires confidence in the acquisition opportunity.

If you want to secure the highest price and the best terms, you are going to need at least two buyers competing in a confidential auction process.

By providing a due diligence report in advance, you are saving time and also providing potential buyers and their lenders with sufficient information for them to submit an LOI (purchase offer) and close the deal in a timely manner.

Professional preparation also enhances the image of your company.

7 Challenges of Selling a Privately-Owned Business

If you are considering selling your business in the next few years, you may want to take a few minutes to read through some of the most common challenges and decisions you are likely to face.

1) Leave or Stay

Let's put it another way: Sell 100% or Recapitalize your Company by Selling a Minority or Majority Stake.

You need to consider whether you want to leave the company entirely or whether you want to remain for some time after the sale. And if you leave, how quickly do you want to transition out of the business: 3 months or 3 years?

If you stay to work for someone else and retain a minority stake, you may see your company change direction and the new owners may make decisions you don't agree with.

On the plus side, if you stay and retain a minority stake, there is a strong chance that you can sell the company for a higher price than selling 100% today. Buyers reward your confidence and pay a higher price, because among other things, they have less risk. You also get to enjoy seeing your company grow and then earn a significant second pay day in a few years.

But, you have to ask yourself if you can handle someone else steering your ship in the meantime. Consider how their decisions could put your remaining investment at risk?

2) Protecting Your Employees

Over the years, your employees have relied upon you to do the right thing and consider not only their lives, but also the lives of their families who also depend on you.

Many of your employees have become part of your business family and you want to treat them with the care and respect they deserve. You want to reward them for their loyalty and hard work.

In some cases, you may be able to negotiate employee protection clauses that will calm your employees' fears during the transition. At a minimum, you can make sure that you not only get a great price when it's time to sell, but that the new owners are going to do the right thing for the future of your Company and all those who have a stake in its success.

3) Letting Others Take a Look at Your Books

In many cases, this could be the first time you have opened up your books to anyone who is not in your inner circle. When you sell your company, you have to go beyond your attorneys, accountants, managers and financial advisors. If you want to get the best deal, you are going to need to open up your books to a number of prospective buyers.

Not only are they going to look deep into your financials to determine and validate their purchase offer price. They also need to gain a deeper insight into the way you have run your company, look at how you have made your decisions and how those decisions may affect the future, as well as determine the financial strength and stability of your company.

Before anyone looks at your books, however, you need to have an independent expert go through them thoroughly to identify any issues or problems that a buyer may be concerned with.

There is often plenty of time to resolve the problems before anyone sees your financials. It also makes sense to better organize your financial information and make some adjustments for non-recurring and discretionary expenditures, which may distort the true cash generation capability of your company to a new owner.

4) Determining a Fair Price for Your Business

It makes sense before you get too far down the road to get a reasonable indication of what your company could sell for. You should probably hire an independent firm to appraise and value your business.

Not only will give this you a better idea of what to expect, but it will also help in planning for your future. The valuation will be contingent on the terms that you insist upon in the sale, as well as prevailing industry and market conditions, but a valuation expert should be able to make adjustments and produce a range of valuations for those variables.

5) Structuring the Sale

How will the purchase price be paid to you: in cash, stock, earn out, warrants, options, or a combination of all? Deciding on the right deal for you has advantages and disadvantages that an expert should help you understand in advance. An expert can also explain how your decisions could affect your net proceeds from the sale.

Anything is possible and you will be in control of all negotiations. It is a good idea, however, to have a clear plan of your ideal exit before you start the sale process.

6) Maximizing Sale Price

There are many books and thousands of pages written on all the steps you should go through to maximize the sale price of your Company. A common theme throughout is to start early, prepare very thoroughly before going to market and keep your cards close to your chest. You should only discuss progress, updates and strategy with your advisors in the sale. You have a valuable and unique asset in high demand. Hard work and the right sale strategy will deliver a higher and broader range of purchase offers for you to choose from.

7) Choosing the Right Team to Represent You

You are the expert at running your business. No one has more experience and nobody is better informed. You have been through the highs and lows of multiple business cycles and you understand the challenges of your business better than anyone.

So, it makes sense that when it comes time to sell your business to look for the same qualities in a firm to represent you in the sale. You need to find a team who has experience in your industry, who is well informed with extensive buyer relationships and who will work hardest to bring you the best deal possible. Let them do their job.

Experience in marketing your Company and structuring a sale is critical to bringing you the highest price. An Merger and Acquisition intermediary will also work closely with your legal and tax experts to minimize your liabilities post-acquisition and maximize the after-tax proceeds to you and your family.

When it comes time to engage a firm, you need to do your homework. Interview all the team members who will be working on your project, check references and view examples of their previous work. As a final check, you should also call their former clients to see how they performed in the past.

M&A Data - Making Sense of the Conflicting Reports

In 2009, the financial newswires are sending us mixed messages.

1) PricewaterhouseCoopers just released a report showing huge declines for global deals in the Industrial Manufacturing sector.

2) The same week, GF Data Resources reported that middle market deal volume for transactions valued between $10 million and $250 million remained strong in 2008.

So, on one hand we have terrible numbers for 2008 acquisition activity and the next report tells us everything is fine.

We highlight the data from both reports and then explain what it means for middle market companies in the US.

Part I - PWC Reports Negative M&A Activity

Last week, PricewaterhouseCoopers LLP ("PWC") came out with their report of 2008 M&A Data in the Industrial Manufacturing Sector, analyzing mergers and acquisitions with a disclosed value over $50 million.

The number of Mergers and Acquisitions in the industrial manufacturing sector dropped 32% in 2008 compared to 2007, with total dollar amount of deals declining 57%.

The research appeared in PWC's report: "Assembling Value: Fourth-quarter 2008 Mergers and Acquisitions Analysis" released last week.

In 2008, there were 141 deals above $50 million, compared to 206 deals in 2007 and 169 deals in 2006.

Total dollar amount of deals reached $39 billion in 2008, less than half of the $88 billion in 2007.

The average dollar amount of deals dropped to $275 million per deal in 2008, compared to $424 million in 2007 and $545 million in 2006.

Fourth Quarter 2008 shows steepest declines
Q4 2008 showed a particularly steep decline with only 11 deals, compared to 71 deals in Q4 2007 and the dollar amounts in Q4 2008 were only $3 billion, compared to $40 billion in Q4 2007.

$1 billion+ deals
In 2008 there were only 5 deals with a disclosed value over $1 billion, compared to 17 in 2007 and 23 in 2006.

Financial buyers
Financial buyers, who are typically very active in the manufacturing sector, only acquired 37 companies in 2008, compared to 72 in 2007 and 58 in 2006.

Strategic buyers
Strategic buyers acquired 104 companies in 2008, compared to 134 deals in 2007 and 111 deals in 2006.

PWC's data does not include most of the middle market deals under $50 million and many of the deals under $100 million where deal terms and sale prices remained confidential, but it is a good indicator of recent trends across the middle market.

Source: PricewaterhouseCoopers LLP

Part II - GF Data Resources reports High Valuations and Strong Deal Volume

GF Data Resources released its Middle Market M&A Valuation Report for the fourth quarter of 2008 the same week. GF Data Resources is a proprietary database that collects data on Private Equity transactions valued between $10 million and $250 million.

According to GF, Middle Market deal volume and valuations held steady across all industries from Q3 2008 to Q4 2008.

Deal Volume
114 Private Equity firms contributed to the report and they completed 25 deals in the fourth quarter of 2008. 27 deals were completed in Q3 2008, compared to 50 deals the first half of 2008. This confirms steady acquisition volume through all four quarters of 2008.

A driver for this deal volume is the substantial availability of cash at Private Equity firms. Many of the Private Equity firms ClearRidge has worked with in the last few months have confirmed that they are sitting on up to 90% of the capital they raised in 2007 and 2008 and they are being encouraged by their limited partners (investors) to keep the money, go ahead and source new acquisitions.

This untouched cash is often referred to as "dry powder" and the substantial stock piles of cash will prove to be a significant driver to Acquisition volumes by Private Equity firms in 2009.

Valuations
"Fourth quarter valuations remained in line with quarterly averages dating back to mid-2007, when the mortgage lending crisis first affected public equity markets," according to Andrew Greenberg, CEO of GFDR.

The primary valuation metric - Total Enterprise Value as a multiple of adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (TEV/EBITDA) was 5.9x for Q4 2008, down from 6.3x in Q3 2008.

Debt Levels
The biggest change in 2008 was a decrease in debt levels for the acquisitions. "Debt levels fell sharply, a result of the tightening credit markets and the lack of available cash needed to finance these deals," according to Mr. Greenberg.

"Total debt and senior debt declined dramatically, falling to 2.4x Adjusted EBITDA and 1.9x, respectively," said Greenberg. "Those number were 3.4x and 2.6x, respectively, in the third quarter, and averaged 3.4x and 2.5x respectively for the first half of 2008. As a result of declining debt levels, average equity contributions soared to 59.9 percent, up almost 20 percentage points from the third quarter of 2007."

Debt Pricing
Debt spreads widened, as the 90-day LIBOR interest rate (a benchmark for commercial lending) dropped from 4.1 percent on September 30 to 1.4 percent at year end. Average initial pricing on senior debt declined only slightly (from 7.4 percent to 7.2 percent), causing the average spread on senior debt to jump from 4.3 percent to 5.8 percent. Spreads on subordinated debt also increased.

Individuals and companies interested in subscribing to the Middle Market M&A Valuation Report can contact GF Data Resources by visiting their website, www.gfdataresources.com. Source: PEP Digest.

Part III - The Truth Behind The Numbers

Acquisitions are still happening. Deals are getting done.

For an acquisition to get to the finish line, it needs to make sense for the acquirer and make sense for the company being acquired. Nothing has changed there.

The Sale Price of Your Company
It is true that companies are still selling for high valuation multiples. However, acquirers are forward-looking in their valuation, so last year, they would have used your 2007 full-year EBITDA number and then paid a multiple on their projection for full-year 2008 EBITDA.

Moving to the present, if your EBITDA was $7 million for 2008 and a company like yours should sell for 5x, then if you anticipate 2009 EBITDA remaining at 2008 levels then you could still anticipate that your company should sell for $35 million. Good news.

However, many companies are likely to face a tough 2009. Let's say you expect your 2009 revenues to decline and as a result you project your 2009 EBITDA to come in around $4.5 million. Well, it is still reasonable to expect a 5x multiple or more, but now that 5x may is worth around $22.5 million on projected numbers.

So, how do you get back the additional $12.5 million your company could have sold for last year? You need to be more creative and more flexible.

Instead of requiring full cash payment at closing, you should consider a combination of seller financing, stock and warrants, in order to get closer to last year's expected sale price of $35 million.

Even if the buyer tried to negotiate a reduced multiple to maybe 4.5x, that could be acceptable if they are willing to add further consideration (cash, stock, warrants) for special consideration and intangibles, which could include high market share, significant customer relationships, brand name recognition, or any other intangible that sets your company apart from the rest.

Getting your deal done is an art not a science. Every company is different, every situation is different and every deal needs to be different.

Deals are getting done. Debt financing is still available for buyers. You just need to work smarter and harder in the current environment to get your deal done.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

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Supply and Demand – Maximize Sale Price

Supply
You own a unique company with its own distinctive characteristics and competitive advantages.  There is a very low supply of privately-held midsized companies. You may only have a handful of competitors in your space. So, if an entrepreneur, strategic buyer or investor wants to enter your industry, they either have to either overcome what may be significant barriers to entry or buy one of the current market participants.  Companies in your industry are few in number.

Demand
1)    Consider how many thousands of corporations, financial buyers, wealthy investors and operators want to get into your industry.  

2)    Of the thousands of buyers for midsized companies in the US, there may be as many as a few hundred who would have real motivation to buy a company like yours and would be prepared to pay at least a fair market price.

3)    Of these several hundred, there may be thirty or more who would enter into a bidding competition any pay a very attractive price to buy your company. First of all, however, they need to know that the opportunity exists.

Only a few logical buyers?
It is a regular statement from owners of successful businesses that there are only a few logical buyers for their company.  This may be true for your company, but nine times out of ten, you just need to think outside of the box to identify who else might offer the highest price with the terms you are looking for.

When a large public company is acquired, there is information available to every potential suitor in the world. In most cases, you can be sure that a public company has sold for the highest price possible on that given day. Why? Because every possible buyer had information available to allow them to bid on the company.

And remember, just like a public company, you own a valuable asset in short supply.

Unfortunately, when it comes to selling a midsize company, you don't want to let the whole world know you are selling your company.  The downside of keeping it a secret and only talking to a handful of buyer prospects is that you give the buyers the power and negotiating strength when in fact you should be the one in control.

Unless you take a direct, pro-active approach, you are going to be at the mercy of luck coming along at the right time and after a few phone calls, having the right buyer take an interest.  Even if the best buyer came along, they’re not going to pay you the highest price, because they don’t have to.

If a buyer suspects that there are only a few others competing to acquire your company, they have limited competing bidders to worry about.  Statistically, there is such a remote chance that any of the other buyers are going to pay a premium price, that all they have to do is wait until you are worn down and ready to accept a reduced offer.  At most, they will only pay a fair market price.  Why would they pay any more if they don’t have to?

And, even after they have signed a Letter of Intent to buy your company, they can always stall the process by giving it enough time during due diligence and highlighting some weaknesses.  Every company has faults, and they’ll just use some of yours to pretend that they are less interested and less willing to honor their initial offer.  As long as potential buyers play the waiting game, chances are you’ll end up selling to them for a significantly lower price than what they are able and willing to pay.

Watching and Waiting
Unfortunately, as we have all learned in life, simply waiting for something good to happen, rarely rewards us.  Instead, we need to make sure that every prospective buyer who could have a real interest in acquiring your company is at least made aware that there is a company of your size, type and approximate location available to buy.

They won’t know the name of your company, you won’t compromise confidentiality, but you will learn which prospective buyers are really motivated.

There is demand, but it’s up to you to find it
Remember, there is demand out there for your company, but unless you are proactive and carefully consider your approach, buyers won’t come to you in sufficient volume to give you the negotiating strength necessary to enhance the value of your company.  Over 80% of clients who hire ClearRidge ultimately choose to sell to a buyer they have never heard of and almost certainly not one that appeared on their shortlist of the best buyer candidates.

Plan of action
So, what should your plan of action be?  First of all, search for the hundreds of strategic or financial buyers who could have an interest in your company’s type, profile and industry (of course, without them knowing who you are).

Second, before they find out which company is for sale, make the prospective buyers jump through a few hoops and prove their motivation (i.e. with examples of previous acquisitions they have completed, capital they have available, an estimate of terms they would be prepared to offer and their experience in your industry).  That will get the list down to a more manageable number.

Third, get them all to sign a confidentiality agreement.  

Only then do you share the identity of your company.

What is the result?

High Demand (30 or more buyers) + Very Limited Supply (only your company available)

= Significantly Higher Sale Price.

It is not easy to perfect this process, but the logic is very clear.

Put yourself in a position of negotiating strength and you will be amazed at how you can achieve a significantly higher price, agree to better terms, and also ensure that the deal process is completed in an efficient and timely manner.

Just ask a friend who has sold their business the wrong way, and they’ll tell you all about the missed opportunities, complications and problems that occurred along the way.

All rights reserved. Copyright ClearRidge Capital, LLC, 2010.

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