When you’re selling to a strategic buyer rather than a financial buyer, you have to adopt a different mindset. The deal is not always based on a multiple of EBITDA and it’s not always just about negotiating the best price. There are some obstacles along the way that could cause you a long-term headache, especially if the deal doesn’t go through!
Understand your buyer
First, we should outline the basic differences between a financial buyer and a strategic buyer. Most financial buyers will use a multiple of EBITDA to come up with a valuation of your business. Buyers in this category consist of venture capital firms, hedge funds, family investment offices, and ultra high net worth individuals. The main goal of a financial buyer is to make a return on investment and EBITDA is not the only factor but is the main driving force behind most valuations.
With a strategic buyer on the other hand, EBITDA can play a slightly different role or no role at all. A strategic buyer has a specific reason for wanting to purchase a company. Any good or experienced strategic buyer will use a multiple of EBITDA in the valuation as a baseline and/or a great place to start with the negotiation.
What many business owners don’t think about is how their company may be worth a TON more than the multiple of EBITDA. A strategic buyer will generally pay a premium for a business (more than the intrinsic value or EBITDA valuation) because it solves a specific issue such as time to market, product acquisition, client list acquisition, new geographical area etc.
The price a strategic buyer ultimately pays for a company varies massively from deal to deal. It’s up to you to understand WHY someone would buy your company and what it could mean to the potential buyer’s future growth! If you don’t understand your worth and the motivation of the buyer, you could be taken advantage of in more ways than one.
The different profiles of a strategic buyer
- Competitor – A company that you come up against during client acquisition. The synergies in company structures, systems, vendors/suppliers, volume discounts, staff, and overall redundancies make a competitor a common buyer.
- Vendor/supplier – A vendor or supplier can become a buyer if they want to reduce the amount of parties involved between product/service and the client. If you are a distributor or middle man, you are a cost and variable. Think of Amazon. They are gobbling up anyone that comes between product creation and the customer.
- Geographic – Companies are constantly looking to expand into new markets. If you can expedite a buyers strategy because of your established infrastructure in a certain location then it may be worth paying a premium to eliminate time to market and lost opportunities.
- Client – There are rare occasions when a company sells a product or service that becomes so deeply integrated into a client’s operation and livelihood that it becomes more advantageous and cost-effective for the client to purchase the business.
- Natural Fit – The perfect example of this type of strategic buyer is the recent purchase of LinkedIn by Microsoft. The complementary services and user databases makes this a “no-brainer” for both sides. Business Insider has a great article HERE on the deal.
Figure out the why, find the value, and build your case
When you figure out which of the above situations relates most to the vision you have for your exit plan, you can start to answer the all-important question of “Why do they REALLY want my company?”.
If a competitor is interested in your company, for example, it would be worth finding out if they have a client list in place to sell a higher volume of products or services. How about additional products or services you don’t provide? Would they have deeper vendor discounts because of volume?
If the answer is ‘yes’ to any of these questions then it is your responsibility to show the potential buyer that you understand what this could mean to them… and you should be compensated for it! Think about it. If you can clearly see a higher ROI with existing assets, the company may be worth more to a strategic buyer than it would be to a financial buyer who is just looking at EBITDA and multiples to provide a basic return for the shareholders.
Demonstrate the ROI
Don’t assume ROI to only be the buyer’s responsibility to calculate. Now that you’re thinking outside the box of past performance and EBITDA, you have some influence over how the buyer perceives the value of your company. Once you find out why the buyer wants your business, it’s time to really understand what premium you can get. Knowing and understanding how fast the potential buyer can pay for the purchase gives you the control and leverage you need to negotiate the deal you deserve.
For example… if you know based on some assumptions that the buyer could sell additional products and services to your client base, receive cash with order discounts that you couldn’t take, have high projected growth, eliminate the competition just by buying your company, and therefore could pay for the entire purchase within 48 months then…NAME THAT PRICE!
Why so risky?
If you can’t answer the above question on WHY someone would want to purchase your company (and be 100% clear in your understanding), then you are immediately vulnerable during the negotiation and due diligence process. It is impossible to protect your IP, client list, or your most important assets if you don’t know what to protect!
There can be serious risk attached to a strategic deal. There are far too many stories out there where a potential buyer starts to court a business by initiating a LOI and due diligence process only for the relationship to turn south after the buyer backs out…
After some digging, the business owner finds out that the buyer didn’t want their client list like they suspected. The buyer was more interested in the business processes and decided it would be less work and money to build it themselves!
If you unintentionally give up too much information during the due diligence process and your buyer pulls out of the deal, you could suddenly be left with the nightmare scenario. Not only to do you not have a deal, someone else in the marketplace may now be able to exploit some of your most important assets. PROTECT YOUR INTELLECTUAL PROPERTY AT ALL TIMES!
The forgotten risk factor…
How important is your legacy? How about the future wellbeing of your employees?
If you do a deal with a strategic buyer, don’t assume that your employees will be looked after in the way you intend. In order to make numbers work in a strategic deal, there are many instances where a buyer will eliminate all redundancies and collapse a skeleton of the selling company into the buyer’s operations. Your employees may not have a job left after the sale.
Should you sell to a strategic buyer? You have to ask yourself…what really matters to you during (and after) the sale?