How Can You Achieve the Price You Want?
Common wisdom states that any company is for sale. It is just a matter of price.
Our experience leans that way – most business owners have a ‘price’ that they would sell for.
“If someone was to phone me up and offer £XXM, I would certainly sell.”
Let’s just take this at face value – what is this ‘price’, and where does it come from?
From our experience, there are two drivers that influence the sellers view on ‘price’ – one being the profitability of the business, and the second being the ‘multiple’ that a buyer may pay.
Most owners are bullish about the prospects of a business, regardless of historical performance. Take a business with varying levels of profit – let’s say from £1M – £2M over recent years. And let’s say that the current year is performing well – say at £3M.
In the business owners mind, the £3M usually becomes the anchor point. The psychology here is that the business will continue to deliver the same, or more, level of profit in the future…
Now let’s take a look at the ‘multiple.’
Most business owners are familiar with valuation based on a multiple of profit (or EBITDA). Let’s say that the multiple range for this specific business segment is 5 – 8 x.
In the business owner’s mind, the multiple that is relevant here is 8 x. Why not? The business is unique and for sure, will attract the upper level of valuation…
The business owners view on ‘price’ simply becomes 8 x £3M = £24M. Usually with the expectation that this is paid 100% at completion…
How does this face up to reality?
In practice, very, very few buyers will ever make a call ‘out-of-the-blue’ and make a firm offer that is at the very top end of market value with few (or no) strings attached. Even if the target company will make a fabulous acquisition, it is simply not how it works in practice.
But that does not rule out obtaining a fabulous offer…
So, how do you get the price you want?
OK – let’s simplify to 3 key levers!
The business has to demonstrate stable or increasing levels of profitability over at least 3 years. If the business has two poor years and one good year, buyers will factor that into the math. The business has to show stability to attract the premium offers. It is no good relying on one fantastic year and a history of poor results. And diving deeper – it is important that gross margin is stable (or improving). No point having increased bottom line profit if this is achieved solely through cost-cutting. And remember that profit needs to be stated as EBITDA – and adjusted to the level that a buyer would benefit from under new ownership (both historical AND future).
The business needs to be groomed for sale. For example, that means having a strong management team in place to run the business, systems and processes audited and checked, any legal and financial housekeeping done and dusted, a robust management system that captures all key data to allow for effective financial management. The business needs to be ‘on-track’ for delivering its budget and stay-on-track. Capital and economic controls need to be agreed and monitored in the 12 – 24 months upstream of the exit to maximise the exit balance sheet. Tax planning needs to be in-hand and executed where needed. A strong Information Memorandum needs to be prepared highlighting the business and its future potential. The market for potential buyers needs to be forensically researched…
Most of this work is specialist work – that means hiring experts. This is not a time for DIY.
You will NOT obtain the best bid without competition. If you accept that ‘out-of-the-blue’ offer from an unsolicited buyer – you probably sold too low. It is common sense – a buyer will pitch as low as possible – that’s how markets work!
A good M&A advisor will negotiate between a number of buyers to draw out the optimum bid. We have seen deal values ratchet considerably once buyers have emotional ‘skin in the game…’
There is a LOT more that a professional M&A advisor does to guide a business to successful sale. But for the sake of simplicity, these key levers do form the baseline.
So, if your goal is to achieve the top end of your price expectation, hopefully the message is clear. Preparation is KEY! As is hiring the best possible support to guide you through the process.
If you are planning a company sale contact us now for a personalised appraisal.