Reveal Business Information Gradually

By Bob Wolter, Creative Business Services

It’s easy for a business owner to get excited by an inbound request from an interested prospective buyer and eagerly respond with all of their business’ information. That’s a mistake. There are three main reasons why business owners should slowly reveal information to prospective buyers:

  1. Buyer stimulus

Individuals who own and operate their firms or deal with mergers and acquisitions (M&A) advisors are well aware that presenting just the right amount of information can sway the market. While releasing all your proprietary information at once can be intimidating, supplying it in stages can help you develop a greater connection with a potential buyer.

  1. Competitive tension

Rather than focusing all of your resources on a single buyer, encourage creating a competitive rivalry with a few key buyers. By gradually exposing information to multiple clients, you may be in a position to negotiate more favorable agreements.

  1. Favorable outcomes

Beneficial outcomes also include competitive tension, which may assist in keeping a contract on track throughout the transaction process. Multiple bidders in attendance encourages potential buyers to adhere to the deadlines and avoid extending negotiations.

  • Business owner’s support team

It is critical for the seller to retain an experienced M&A attorney rather than a general attorney.

Additionally, apart from being advantageous to the seller, an intermediary (investment banker, M&A advisor or business broker) is similarly helpful to the buyer and greatly increases likelihood of a successful sale.

Selling your business is a process that needs identification of appropriate “who’s who.” This targeted list is likely to generate many offers for your company, providing you with a competitive edge and increased probability of the best value for your company.

  • Elements to consider when selecting an intermediary

M&A advisors fall into two categories: generalists and specialists.

The generalist will have to scramble to understand your business and what makes it an appealing opportunity. Most likely the generalist will not have connections with potential buyers or strategies.

The specialist in your field already understands the specific industry and will have a good sense of how your business operates. Working with a specialist M&A advisor provides a smoother process for you, not to mention the specialist’s valued relationships with potential buyers which enable him to implement a most efficient approach. As a result, buyers are better able to discern what makes your business unique. Additionally, a buyer’s relationship with the specialist is also valuable, as subsequent purchases are likely.

When interviewing prospective intermediaries, ask them to describe what distinguishes your firm from others. It’s always a red flag when they group your business with others in the same industry not knowing the features that make your business unique. Classifying your business as a commodity can reduce the value of your business.

  • Establishing a relationship with an M&A advisor may take time

It is strongly recommended that you take the time to develop long-term relationships with a few qualified M&A advisors. Select a reputable advisor that you are most comfortable with. A relationship with an M&A advisor is a two-way street.  If feasible, catch up several times a year to share an update on what’s going on with your business. When you have decided it’s time to sell, your M&A advisor will prepare you for the process ahead.

  • Buyer beware: Private equity groups (PE) versus strategic acquirers

Neither are good nor bad, but it’s important to enter into conversations with an understanding of their motivations. The PE strategy in its crudest form is to buy low and sell high. They usually pay a little less than strategies, they use debt and they’ll attempt to sell at a higher multiple a few years later.

Professionalization is required to increase the profitability of an acquired business. In most circumstances, business owners find it incredibly difficult to upgrade corporate processes and protocols to enhance revenues.

But, if you know this going in, it can inform communication and, ultimately, the terms and conditions of the deal. Ask Private Equity groups what they stand to gain by doing so.

Developing a relationship with your buyer during the transaction process will give you a sense of what to expect after the sale. On the other hand, if you believe the PE group can have a significant impact on your business in the future, you may wish to acquire a sizable equity position in the new venture.

The seller conflict is, if I’m going to put a lot of eggs in one basket, I want to own the basket. It’s important to understand that when you sell your business, even if you roll your equity, you’re selling control in most cases.

  • Incentivizing buyers and sellers through managing conflicts

It is critical to understand the incentives of everyone involved in a transaction — from the accountants to the intermediary to the buyer. Incentives exist for all parties engaged in a transaction

Example: When the business began, it utilized a profit-sharing structure. PE acquired the business. PE will be the sole beneficiary of the profit-sharing arrangement. The proprietor of the business, on the other hand, may argue that profit sharing is required. Divergent perspectives may come from the incentives offered by each side. Prioritizing profit over corporate culture has the potential to result in long-term decreased profitability.

PE firms will adopt this hands-off portfolio company management strategy where it makes sense.

There’s a real opportunity in private capital markets to create flexible capital solutions that can expand the way owners and capital partners work together.

While business owners may believe that selling their company is a once-in-a-lifetime event, this is not necessarily the case. Typically, the selling process is gradual. Earn-out clauses and other arrangements that commit you to a business for an extended length of time after the sale are relatively frequent. Entrepreneurs should start the selling process earlier than what feels comfortable in order to improve the business.

  • COVID-19 and the decision to sell

Today’s day-to-day transactional business owners are obsessed with market values. For the buyer, who values a business based on its trailing 12-month earnings, and the seller, who loves the business based on its pre-COVID performance, the goal is to identify common ground on which both sides can agree.

For acquirers, determining a firm’s economic cycle vulnerability is based on its performance during COVID. In the buyer’s eyes, the less susceptible item is the more valuable.

A survey of business owners pre- and post-COVID found that they are now much less likely to pass their businesses on to family members. According to the theory, business ownership has been too stressful during COVID, and they want their offspring to avoid the hardships of business ownership. They’d welcome the option of appointing someone else to run it.

By generating consistent recurring revenue, you can build resilience against future downturns. Entrepreneurs may benefit from the challenge of securing recurring revenue. To enhance revenue, segment your clients into highly targeted, homogeneous cohorts with exact and unique needs for your products or services. Once you’ve identified the recurrent income streams common to those businesses, you will be able to build new revenue streams on which you may rely.

  • What knowledge or talent would you impart to the global business community if you were emperor for a day?

Curiosity possesses actual strength. It’s the interest that drives people to solve problems, and conquering obstacles propels them onward. Curiosity has been the superpower of countless entrepreneurs throughout history. We improve our talents by becoming more proficient in them.

Bob Wolter is Mergers & Acquisitions Advisor of Creative Business Services/CBS-Global.

Call us to 920-432-1166. All your inquiries are strictly confidential.

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