How many potential buyers do you need?
Monday, May 5, 2008/
Having multiple parties are vying for your business is not always a given. It can pay to lay the groundwork before the For Sale sign is put out. By TOM McKASKILL
By Tom McKaskill
Having multiple parties are vying for your business is not always a given. It can pay to lay the groundwork before the For Sale sign is put out.
It is very difficult to extract the maximum value on the sale of your business if you have only one potential buyer. Generally speaking, the only way you can do this is to be in a position where you don’t need to sell but you are willing to do so if your terms and conditions are fully met.
Simply by being hard to get, by having a business which gives you satisfaction and not having any great desire to do anything else, will provide a basis where you force the keen buyer to do all the running.
However, if your business is in trouble and the only potential buyer can afford to wait, you will almost certainly be facing a fire sale, and lose much of the value of your business.
So while one potential buyer is possible, common sense would suggest that several are much better. The question is how many is likely to create an optimum exit?
The real issue here is how well you have selected your potential buyers rather than how many. A lot of possible buyers where none have a burning desire or need for the acquisition is almost certainly worse than one keen buyer. Thus an important component of preparation for sale is to ferret out those companies that have the highest need for what you can offer but are also in a position where they have the willingness and capability to go through the acquisition process.
There are some simple rules of thumb when it comes to identifying possible buyers. Most buyers are larger companies within the same industry; they typically have acquisition experience and deal with similar or complementary products.
By doing some industry analysis and working with professional M&A advisers, it is not difficult to narrow down a list of possible suitors. The next stage would be to establish contact with them to ascertain their appetite for new acquisitions, especially for a business like your own.
In the end you need at least two keen, active potential buyers, each of which has a clearly expressed need to acquire a business like yours.
However, sometimes timing does not always work in your favour. At the time you wish to sell, they might be involved in other projects, fighting internal fires, be subject to external threats or have used up their acquisition funds. Thus you cannot really depend on just a couple of potential starters. What you really need is at least six to eight active interested buyers.
With a little bit of luck you will be able to deal with most of them. In the worst case, you can be confident that you will have at least two left to negotiate with. However, your back-up plan should be the ability to delay until circumstances bring more potential buyers into the process.
Also be very careful not to have too many potential buyers. The best ones may simply pull out or they may decide the costs of participating in the process are too high. In the end, it very much depends on your ability to help potential buyers understand what you bring to the table, and in creating some level of competitive tension at deal time.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.