Selling Your Business to a Billion Dollar Acquirer

9/01/2013

 I have recently had the pleasure of negotiating the sale of several mid-market transactions (values between $5M - $50M) to  multi - $billion acquirers.  On some deals LockeBridge identified the Buyer, but on others I was called in after there had been multiple conversations between the Parties.  One thing in common with all these deals, no matter how big the buyer nor how insignificant the impact of the purchase price on their balance sheet, they all work very hard to negotiate the absolute best deal they can.  After all, their performance bonus is at stake!

I have seen both the “wining and dining” approach as well as the polar opposite; a stark conference room with no food or drink offered with six suits from various disciplines on the same side of the table. Indeed in my former life I was one of those suits sitting on the buy-side of the large corporate entity.  There was really no personal reward, no passion nor honor. It's just the opposite sitting on the other side of the table; when we extract more than our fair share of the deal synergies from the billion dollar buyer, for the benefit of our salt of the earth client1, you can bet there is passion. It is one of the best "feel goods" I experience. Okay, more stories another time.  Let’s get down to some business and discuss how to take advantage of the Buyer’s deep pockets.

Note 1: The salt of the earth client is our typical client who founded his business 20 or 30 years ago. He borrowed money from his relatives, worked 60 hours a week at the neglect of his family, and got chest pains never knowing if he would make it.  Thirty years later he has fed his family from the earnings of the business. He is married to the business and the sale of his business will be both a financial and emotional life altering event. Believe me, I know this scenario all too well as I have built and exited multiple businesses of my own.

Big Buyers Can Pay Big Dollars

As a general rule of thumb the larger and further away the acquirer, the higher the offer you can expect to get. That stated, selling your business to the billion dollar acquirer is no walk in the park.  Most multi -billion dollar corporations will not consider an acquisition of a small business,  with revenue and operating income of  less than $100M and $10M respectively, unless there are material synergies with their core operations.   This is primarily because large companies generally have substantial integration costs and purchases of small companies don’t generally move the needle. The point here is that if there are indeed material synergies between the buyer and seller then the Buyer will value the transaction substantially more. Extracting the premium value from the Buyer is yet another story.

Getting a High Valuation

If a large company is considering the acquisition of a small company and/or a cross border transaction you can bet that there are substantial synergies with their core operations and that the acquisition is extremely complimentary to their business plan.

Some examples of the foregoing may be:

  1.  The Acquirer wants to establish a market in a foreign country but wants to better understand all the implications of doing business in such country before jumping in head first in a big way.
  2. The Seller may be doing business with customers in which the Acquirer is having difficulty penetrating and with whom the Acquirer may be able to generate substantial revenue from the sale of their  products.
  3. The Seller may own a technology which enhances the value of the Acquirer’s core product(s).
  4. The Seller may be selling a product which requires a substantial knowledge base and/or would take a long time for the Acquirer to develop.

Most merger and acquisition decisions generally involve an analysis of the costs and benefits of organic growth versus acquiring a business, the technology or the  product.

Extracting a Premium Offer

Just because the value of the potential synergies are high, one should not assume that this automatically translates into a  high price for you.  Here is where you need to employ very well planned negotiation strategies and tactics.  Such skills are generally only found with the best of the best negotiators who have seasoned expertise in the merger and acquisition process.  In fact, often times one or both sides will introduce a new face to the process.  This person may not have been involved at all with the M&A process prior to the delivery of a letter of intent.  This person is the infamous Closer.  Ahh, beware the closer!  His skill set is distinctly different than those on the advisory team which have preceded him.  Be aware that most large Buyers have executed numerous deals and have a team that is well coordinated and trained in all relevant areas such as corporate law, tax accounting, financial analysis and all relevant operational considerations. Their Closer is usually quite experienced in coordinating all aspects of the pending transaction  with the rest of their team.  To the contrary, for most small business Sellers the sale of one’s business is a once in a lifetime event, and as such they just don’t know what they don’t know.

It is incumbent upon the Seller to identify the reason(s) why the Seller’s business is attractive to the Buyer.  Knowing the Buyer’s motivation will provide you, the Seller, with insight into how the Buyer may value the business.  For example, if the Seller has been doing business in a market which the Buyer wants to penetrate, then acquiring your business can be very valuable to the Buyer.  The same goes for the case in which the Seller may have some intellectual property or a product that the Buyer can sell to his existing customer base.  Imagine if the Buyer generates billions of dollars of sales with their core customer base, which also has a demand for your product.  In this case the  Buyer has a "built-in" distribution network, they only have to introduce your product to their existing salespeople. If the process is managed effectively, revenues should be forthcoming relatively quick.   How much premium do you think that your company may be worth to them if his were the case?

The value of your Company is proportional to the profits that the Buyer can make from it. 

In this case, value has nothing to do with your historical profits, although this is what the Buyer will have you believe. The bottom line is that the smart Buyer is not going to disclose their synergies to you, the Seller. Their mentality is that the value of the synergies is theirs and only enabled by their decision to purchase and has nothing to do with your decision to sell.  In fact, I have often heard Buyers state: “If you, the Seller, were able to achieve such an increase in value without us then you would have already done so.”

So, how are you, the small business owner, going to sell your business to the billion dollar strategic buyer while extracting the value of the synergies in order to get that premium price?

This issue will be discussed in upcoming articles. 

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