As a sell-side investment banker we help our business owner clients align their expectations with the M&A (merger and acquisition) marketplace.
Most owners either admit ignorance about the sale process or have developed a series of assumptions based on hope, hearsay and other rumor-based information.
It is important for an owner considering sale to have solid facts so he/she can make the most informed decision possible. There are no dress rehearsals when selling a business – it must be done right the first time.
The most common question asked is “What is it worth?” or “What is the price?”
Although price is important, it is secondary. The most important economic metric for a seller is net after-tax cash, ie, the amount of money received after every third party, including the government, is paid. The investment banker’s job is to maximize seller’s net-after tax cash from sale.
Some owners naively assume their business is extraordinarily unique and can command an above-market premium. These owners are usually wrong. There are a lot of profitable, high-quality, well-positioned businesses for sale at any given time, and buyers have choices (and they know they have choices).
Most buyers in the M&A marketplace are tire kickers, wannabes and people seeking the deal-of-the-century. We call this the “iceberg effect”, ie, only 10% of the buyers one encounters are legitimate. By legitimate we mean 1) they are willing to structure a market-based transaction, 2) they have the cash to close, and 3) they have the psychological ability to close. Legitimate buyers are the exception, and it is the investment banker’s job to find these buyers and to tell the others to either ante up or stop wasting everyone’s time.
It is the investment banker’s job to understand legitimate buyers’ expectations and to share these “value drivers” with the owner so he/she is informed. The more value drivers the higher the premium.
In a sale transaction there are many moving parts, and buyers know how to promote their best interests – often to the detriment of the seller. Because most sellers have not sold before they need to protect themselves with a strong team including an experienced investment banker, M&A attorney and CPA.
Realistic expectations, a business rich with value drivers and an effective, confidential marketing campaign that targets legitimate buyers is the best way an owner can maximize net after-tax cash from a business sale.