If you intend to exit from your company one day by selling to an outside buyer, at some point in the process, you may well find yourself feeling like the diminutive David facing the monstrous Goliath. And for good reason. Buyers possess fundamental advantages over most sellers due to their diverse experiences and resources. These advantages enable buyers to potentially dominate the process of acquiring your company and put you at risk of receiving a lower price and less favorable terms than might otherwise be available. When you go to exit, if you are unaware and unprepared to counter buyers’ advantages, your exit may be less profitable and more stressful.
Here are nine specific ways buyers often have the upper hand and how to combat them.
- Money/Cash – In most situations, the potential buyers have it and you do not. There’s an old saying that rings especially true here: “In any negotiation between two parties where one has all the money and the second has none, the party with the money wins.”
- Emotional Investment – Buyers interested in acquiring your company are likely to have low to no emotional investment in the deal, whereas it’s common for business owners to describe the companies as “their baby” or “their third child”. A deep emotional investment in the business is an asset and a source of pride while growing and leading the company, but it can make you vulnerable during the negotiation process.
- Deal Importance – Many buyers are serial purchasers—if acquiring your company falls through, they simply move onto the next transaction without suffering any losses. For most owners, getting the deal done is supremely important. Without a successful transaction, you likely cannot achieve your business and personal goals.
- Internal Team Experience – Buyers usually have a team of full-time personnel with significant deal experience, often with a history of dozens of transactions. Most business owners have few to no employees with deal experience, including themselves.
- Outside Specialists – Buyers usually have a team of external advisors they regularly go to for transaction advice and services, including lawyers, accountants, investment bankers, commercial bankers, and others. These advisors often specialize exclusively in transaction work. In contrast, business owners often use their existing generalist advisors who may have limited deal experience.
- Market Knowledge –Your future acquirer will most likely have deep knowledge about relevant M&A activity in your industry at the time you plan on selling your company. Through formal research and first-hand experience, they will likely know key M&A trends, multiples, players, and opportunities. Sellers often lack this information and risk over-relying on anecdotes and assumptions.
- Experienced Negotiators – Buyers are not infallible superbeings, but most have extensive experience negotiating deals. Therefore, they may know a few tactics that help advance their interests and position. Most owners get good marks on street smarts, but in many cases, the owners’ job does not require him or her to negotiate a steady stream of deals worth many millions of dollars.
- The Process is the Job – Buyers, whether strategic buyers or financial buyers, typically have people they employ whose primary or sole job function is to work on potential acquisitions. For them, this process is their job. In contrast, for sellers like you, preparing the company for sale and then supporting the sale process is a burden you will absorb on top of running the company. For you, the process is a distraction from your everyday job and a big drain on time, money and energy.
- All in a Day’s Work – Because the process is the job for your future buyer’s people, the work, analysis, stress, and decision-making associated with potentially acquiring your company will be just a typical day’s work for them. When you finally go to sell your company, you will likely find yourself on unfamiliar ground, far outside your experience and comfort zone.
These potential buyer advantages will not occur in every given situation, and not all buyers are equally experienced and competent. However, given these obvious advantages, it becomes easy to see how buyers can outmaneuver sellers if left unchecked. As a future seller, you can take reasonable precautions to reduce or eliminate these buyers’ advantages:
- Add people to your team who have deal experience. It is not unusual for our clients, once they recognize a sale is in their future, to fill open senior management positions with people who have deal experience.
- Build a team of specialist advisors. Your accountant, lawyer, investment banker, and exit planner should all have extensive experience working with companies and transactions similar to yours.
- Meet with your advisory team well in advance of your future sale. Too many owners only convene an advisory team shortly before they want to sell. That’s a mistake. Get your team together several years before you intend to sell and meet with them at least annually. They can help prepare you for the process and experience. They also should be able to help educate you on relevant market conditions, trends, and valuation multiples.
- Distribute surplus cash from the company to build your personal liquidity prior to the sale. The more liquidity you have at home, the less stressful the sale process is likely to be.
- Delegate responsibilities off your plate to others on your team for two potential reasons. First, reducing dependency on you usually increases company value. Second, freeing up time creates additional bandwidth for you to support the exit process without getting overwhelmed.
- Take the time to educate yourself. Your advisors will help, but you can learn a lot about what to expect with just a little research. This complimentary webinar, “What to Expect When You are Expecting to Sell,” is a good starting point.
Preparing for exit well in advance and with expert help will go a long way towards evening the odds between you and your buyers. At NAVIX, our clients start the sale process prepared, with more than just a slingshot in hand. Contact us to discuss your exit goals and get answers to your exit questions.
This information was published originally by NAVIX Consultants and is for educational purposes only. Please consult your tax, legal, and other advisors to evaluate how this material may apply to you and your businesses. NAVIX does not provide tax or legal advice nor services.