The article discusses various strategies to bridge the valuation gaps between business buyers and sellers. It mentions using earnouts and milestone payments tied to future performance metrics, keeping part of the purchase price in escrow, seller financing, equity rolls, discounts on future commercial relations, retention of real estate by the seller, anti-embarrassment protection against quick resale, carving out lesser-valued business components, and having a solid transition plan to retain key personnel.
Choosing the right M&A advisory firm to sell your business involves aligning your business needs with the firm's expertise. Several types of firms cater to different marketplace needs: Business Brokers focus on small businesses; Niche M&A Advisory Firms offer specialized services to private companies; Lower-Middle-Market and Middle-Market Investment Banks deal with larger corporate finance activities; Bulge Bracket Investment Banks handle large-scale transactions. Understanding your business and the M&A landscape is essential when selecting the right firm.
The article discusses how business sellers can mitigate the potential risk of 're-trade', a situation when deal terms are revised negatively at the last moment. Key strategies include proper preparation before negotiations, carrying out due diligence from a buyer's perspective, outlining non-negotiable terms to potential buyers, having alternate options, and validating the buyer's due diligence. The seller should be wary of certain warning signs that a re-trade may be forthcoming, such as vague offers, inadequate due diligence, and poor understanding of the business.
When selling a business, the timing and approach to engaging with potential buyers is crucial. A measured approach is necessary to maintain buyer interest and avoid potential pitfalls. Clear objectives should be defined before initiating discussions; their interest and strategic fit should be assessed before discussing value. Testing the waters before being prepared to sell or without realistic expectations can lead to negative consequences. Engaging an experienced M&A advisor can help determine a value estimate and facilitate negotiations. Sequentially engaging with buyers individually may complicate transactions.
Negotiating a successful M&A transaction requires flexibility and understanding of both parties' key priorities. Listening to learn can expose hidden assumptions and enhance compromise. Sometimes, flexibility on purchase price, deal terms, and process timing can increase the chances of a successful close. Having multiple financing options also aids closure. However, parties must be ready to abandon deals not meeting their top priorities. Ensuring a transparent process where key information is shared timely will boost the likelihood of a successful transaction.
Selling a business can be challenging, especially as buyers closely analyze potential risks. These could be risks that sellers, due to their familiarity with the business operations, may see as immaterial. Buyers often focus on the inherent risks rather than the upside potential and discount their offer to cover perceived risks. It is important for sellers to understand this fear-based perspective, and objectively identify all conceivable risks in their operations, market, employees, suppliers, etc. Demonstrating flexibility around deal structures can help alleviate buyers' risk concerns, thereby enhancing the potential for a successful sale.
In "Business Valuation Mythology 101 – Part II", Eric Bosveld discusses three common myths sellers often believe when valuing their business: owner-benefit add-backs, growth projections, and potential post-acquisition synergies. The author advises all businesses pursuing sales to maintain clean financial records, provide realistic growth projections, and remember that potential synergies might not be reflected in the buyer's offer.
When undertaking a merger or acquisition (M&A), proper team assembly is essential to ensure a successful transaction. Key team members include a competent M&A lawyer, tax accountant, and experienced management. In some cases, hiring an M&A Advisor/Investment Bank or a Transaction Services Firm can significantly enhance the process. Such professionals navigate the complexities of negotiations, oversee the process, and ensure a positive outcome. Additionally, using wealth managers to manage tax-effective use of the proceeds from the sale is recommended.
This article by Eric Bosveld addresses common misconceptions in business valuation myths. It challenges beliefs that asset value equates to business value, arguing that cash flow drive value. Standard EBITDA multiples aren't reliable business valuation methodologies and enterprise value doesn't translate to equity value. Working capital shouldn't be added to business value as these constantly change. The author plans to address more myths in future articles.
An earnout mechanism, used by buyers and sellers during M&A negotiations, can bridge differing valuation perspectives by tying a portion of the purchase price to future business performance. Data shows that 27% of sub-$50 million deals involve an earnout. However, it poses risks for sellers who lose control over business decisions that may affect the payout. Amid the COVID-19 pandemic, complexity could increase with earnouts potentially becoming a bigger part of the deal and extending over longer periods. Properly structured earnouts can mutually benefit sellers and buyers, but require careful consideration due to their legal and tax implications.