22 Dec Business viewpoint: ‘Limited auction’ best way to sell company
Published in The Tulsa World
It’s a busy time of year. About 60 percent of all mergers and acquisitions close in the fourth quarter, and 70 percent of those deals close in the last two weeks of December.
Year-end is also a time when business owners set their goals for the coming year. Some will place “exit” on their list.
Those who decide to do so should keep in mind the one absolute, undisputed key to selling a business for maximum value. Everyone knows it, deep down, and accepts it as fact. Still, many try to find another way, attempt to ply an alternative route to an optimal sale. In my experience, there isn’t one, at least not a viable one.
Why do business owners do this? There can be many reasons, including ignorance, hubris, fear, ego and a willingness to accept mediocrity.
So, what is the absolute, undisputed key to maximizing the sales price of a business? Working multiple, high-quality buyers simultaneously to generate multiple, competitive bids.
Some call it the “limited auction” technique. It’s not a bad name, except that it’s thrown around by some of the up-front fee collection firms, which can be a scam.
But, to be sure, the ideal process “limits” buyer candidates, that is, it includes only the best, most capable buyers in the world. The ideal process also includes a, “Going, going, gone!” It’s the essential auction component, although in an M&A deal it may not take place in public, but in a confidential process involving the seller, buyer and a professional adviser.
Take my word for it. Business sellers – even smart, successful ones – actively take alternative roads to sell their businesses. This can lead to a negative outcome for them as well as others, such as employees, vendors, customers and the owners’ family members.
So if you’re the owner of a private company and plan to sell or recapitalize someday, you have a choice to make: Find a way to run a process that secures for you the key to closing a deal for maximum sale price, or try an alternate course.
Every alternate course means talking to buyers one-by-one. The result is always the same: Sellers reduce their negotiating strength, cannot enforce deadlines, limit choices and find it difficult to walk away.
In contrast, marketing a business to multiple potential buyers at once helps increase the likelihood that the seller will receive greater value for his or her business.
“Value” can be anything desired by the seller. Most often it’s cash, but there are myriad value points in every deal – warranties, representations, leases, options, consulting agreements, termination rights, break-up agreements, expiration dates, etc.
When negotiating power rests squarely in the hands of the seller, it can be wielded to extract such value. This is when a deal becomes fun.