We are all familiar with the typical process to make a large item purchase. Someone puts a price on it and we make an offer lower than the asking price. Then, we negotiate to reach a deal, typically in the middle somewhere. This is not the way the sale of large businesses is done if a merger and acquisition advisor is handling the sale. They are usually marketed without a price. Here’s why, how this sale is done, and if selling your business without an asking price is best.
First, it’s good to understand why the sale of a smaller business – under $2,000,000 in revenue – is done with an asking price. That’s because the primary buyers are individuals and individuals respond better when there is a price. Typically, they may know when a price is way too high, but they have more trouble presenting an offer if there is no asking price. Typically, they would present a very low offer in that situation. By putting a price on the business, it sets the expectations for the sale price. Rather than presenting a very low offer, the individual doesn’t pursue the business.
Before I get into the why, and how, of selling a business without a price, I need to explain something about business valuations. There are three primary approaches used in a business valuation. The first is the asset approach – what the assets would sell for in an orderly liquidation. The second is the income approach – using the earnings of the business and return on investment criteria or discounted cash flow to set a value. The final is the market approach – what multiples similar businesses are selling for and applying them to the financials of the business being valued. In many sales, the value of the assets is much lower than the other two values and not factored in to the valuation. This valuation is what a “financial” buyer would pay. It considers the business value as a standalone business.
Putting a price on the business will put a cap on the price offered. The purpose of selling a business without a price is to sell it for a higher price to a strategic buyer. This is a buyer that will earn more from the acquired business than it is currently generating. This is because the strategic buyer has assets that will allow it to do so. For example, a common one is that the buyer merges the acquired business into their business and eliminates many expenses by doing so. Another common strategic value is excess production capacity that is filled by merging the two businesses. Another strategic value could be the buyer’s better, or larger, sales force that can expand the sales, and profits, of the acquired business. Or, the acquired business could have intellectual property that the buyer can utilize better.
Merely putting the business on the market without a price will not get the best price. Most of the potential strategic buyers will not be aware of the business for sale unless they are contacted directly. This is done while keeping the identity of the business being sold confidential. Many potential strategic buyers do not present the best offer so it is necessary to contact many of them. What we want to achieve is a competitive, private, auction where the seller has multiple offers to choose from. By doing so, we can get offers that are higher than the financial value of the business.
This is a very brief explanation of the process we use for selling larger businesses. These are typically ones with $2,500,000 to $15,000,000 in revenue. If you have such a business and want to sell it, contact us to discuss whether this process is the best way to get the highest price.