Traditional valuations are based on EBITDA multiples. That is, the amount investors make as a return on investment by buying a business and paying themselves a dividend of the free cash that it produces. Future uncommitted discounted cashflow, at the prevailing rate of return needed by an independent investor, a value can be assigned to the business. Entrepreneurs typically raise their market value by improving profitability (EBITDA) and providing a platform for future growth. However, this model fails to take into account the extra benefits that a corporation could get by strategically leveraging the assets and capabilities of the acquired business within a larger entity.
Strategic Buyers Can Justify Paying Higher Premiums
If there are indeed real synergies between the buyer and seller then transaction value should be substantially higher. Extracting that premium is the challenge for middle market sellers. The larger and further away the acquirer, the higher the offer you should expect to get.
How Do You Get a High Premium?
If a large international player is considering the acquisition of a small company and/or a cross border transaction you can safely assume that there are real synergies and that the acquisition is extremely complimentary to their business.
- The Acquirer seeks to strategically set up a market in a foreign country but wants to better understand all the implications of doing business.
- The Seller may have customers that the Acquirer cannot easily penetrate and with whom the Acquirer could generate additional revenues from the sale of their products.
- The Seller may own a technology which the Acquirer covets.
- The Seller may be well positioned in a market that requires a real knowledge base or relationships that would take a long time for the Acquirer to develop.
Most merger and acquisition decisions generally involve an analysis of the risks, costs and benefits of organic growth versus acquiring a business.
Finding That Elusive Strategic Buyer
Start looking for a strategic buyer by asking some key questions:
- What corporation has a large customer base that would buy our products?
- What corporation has a set of products that could be readily sold into our customer base?
- Could our products or underlying technology be used to open new markets for a big company with the resources to fund market development?
- In conjunction with the capabilities and technologies of a large corporation, could our business offer the entry point for a large corporation to break into a new growth or geographic market?
Most often, the seller and the strategic buyer are in the same industry. They often sell to the same customers and markets. As a result, potential buyers readily appreciate an opportunity once it is presented to them. But even a great opportunity will not normally get results without some preparation. A premium selling price can be justified only if the vendor’s business can be rapidly integrated into the buyer’s organisation for the opportunity to be readily exploited.
That means the business must be ready for immediate sale, with no underlying problems, minimum risks or potential litigation. Internal systems for performance management, compliance and operational efficiency have to be in place and working.
Key employees need to have incentives to prepare the business for sale as well as be willing to assist in the transition of the business to the new owner. Finally, the owners and the senior executives who are not part of the acquisition need to be able to prove to the new owner that they have built a robust management team.
Of course, it is essential to have more than one potential buyer when the time to sell arrives. This lets an auction develop among several potential acquirers where each will see a compelling reason to make the acquisition. It is also essential to obtain the best professional advice that can be afforded. Professional advisers experienced in working with large corporations on acquisitions are very useful in the seller’s corner. 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 Investment Bankers will introduce a new face to the process.
Obstacles Confronting Middle Market Sellers
- Usually a middle market seller has a clear, somewhat limited, market niche that reduces the number of potentially interested acquirers.
- In certain industries and for certain companies, where a seller only possesses a significant sales presence in the US, many acquirers’ interests have been reduced due to the selling company’s inability to generate foreign sales. These factors will reduce acquirers’ price aggressiveness in pursuing this type of deal.
- In general, acquirers are accustomed to taking advantage of middle market sellers. Most acquirers are trying to steal your company. Many sellers retain advisors with only limited negotiating skills or strategic deal capabilities, or ones that lack the toughness necessary to obtain a premium price. These advisors are too often willing to accept sub-standard prices and deal term norms that are not conducive to the maximization of a seller’s economic interests. Other uninformed sellers, try to handle a sale without an acquisition advisor. Instead, they rely only on themselves and their personal attorney to consummate the acquisition. This is absurd if one has any grasp of the complexity involved in getting a large acquirer to pay a premium price, while providing reasonable protection to a seller in the deal terms. As the attainment of a premium-priced deal will only be obtained by a seller that executes the sale process with skill and ability, it requires an advisor that has considerable sophistication to generate a premium price.
- The inability of sellers and most advisors to seek foreign markets for potential acquirers greatly reduces the number of strategic acquirers available.
How To Overcome These Obstacles
You must understand that any strategic acquirer who really wants your niche will eventually buy it at a premium price. However the acquirer usually must be forced to pay this price, as they know that most sellers settle for inferior deal pricing. However the right strategic acquirer, if forced through the sophisticated execution of the acquisition process, will eventually pay a premium price. Force the acquirer to pay that price; “don’t leave money on the table”. Furthermore, the only acquirers that will be scared-off in the long-term by a seller’s aggressive deal positions are the ones that only have a lukewarm interest in buying your company. These acquirers will never buy your company unless they receive a bargain price.
A selling middle market owner that utilizes the following approaches and methodology in pursuing a potential sale will always be able to eventually do a fully priced deal with strong deal terms that protect them from unreasonable post-closing exposure.
- When your market niche is the best deployment of an acquirer’s capital, they will buy your company. If you are talking to the right type of strategic acquirer, this will eventually happen at a premium price. You do not have to give the right strategic acquirer a bargain price to make the acquisition of your company the best deployment of their capital. However to be successful, it is imperative that you sell at the ideal time. Correspondingly, do not put time pressure on yourself to consummate a sale quickly.
- You must convey to acquirers that your pricing expectations are firm. If you do not get your price, you simply are not going to sell the company. To sustain this, you need the strength, fortitude and confidence to convey that to an acquirer.
- Some misguided executives believe a seller’s position is weakened, if it takes a long time to sell a company. This is simply not the case.
- Emphasize to the acquirer that you are aware of the entry advantages to them of buying a company as opposed to entering a market through a “Greenfields Approach”. An acquirer should be aware that you not only understand this, but are aware that if they really want a strong entry position into your market, it will be easier and less expensive to get it by buying you than by competing against you for market share.
- Get a tough, knowledgeable negotiator for an advisor. This advisor must understand the corporate culture of large companies. They must be aware of the differences that are often present between the personal objectives of the acquirer’s corporate development executive handling the deal and the goals and aspirations of the operating people pushing the acquisition for the prospective purchaser.
- Your advisor must have access to foreign strategic acquirers. This will tremendously increase the breadth of acquirers available to buy your company.
Even though the transacting of premium-priced deals with strong deal terms that protect a seller against unreasonable post-closing exposure is not an easy task in the current business environment, it is a task that a seller can always successfully accomplish, if they utilize the approaches and procedures defined in this article. A seller should not be intimidated by an acquirer’s arrogant and demanding attitude. They should understand that large acquirers are used to bullying middle market sellers into accepting minimally-priced deals. These prior successes of large acquirers, as they prey on poorly advised, uninformed, and weak-spirited sellers, produces an attitude that I have found can always be overcome by the strong-willed approach of a seller that employs the right advisory team to guide them. Do not be daunted by the obstacles you face, as success ultimately will come if you expertly handle the transaction.