Negotiating a Premium for the Sale of Your Business can take substantial preparation well beyond practicing your presentation. Most Buyers are significantly larger then the Seller, have executed numerous deals and have a team that is well coordinated and trained in all relevant areas of merger and acquisitions. Knowing that most Sellers of small businesses have never sold a business before you can be easy prey for the Buyer if you are not well prepared.
The key to achieving a premium for the sale of your business is not necessarily your ability to make a credible presentation of the valuable assets and opportunities in your business, which are rarely presented in an optimal fashion. When selling your business to a strategic buyer the most critical aspect of the negotiation is dependent upon your understanding of the Buyer’s operations and the determination of the value of the synergies which would be created by the merge of the two companies. Most people relate to the term 1+1=3. What is implied by this term is that the sum of the parts, when combined together, exceeds the total of the individual components when they remain separate. The amount by which the former exceeds the latter is referred to as the value of the synergies.
Synergies can come from either or both the cost side or revenue side of the equation. On the cost side, the consolidation of the operations generally presents a significant opportunity to cut costs. Examples of typical cost cutting are: Closing of duplicative locations, elimination of redundant jobs, an increase in buying power and reduction of part numbers. On the revenue side there may be an opportunity to raise prices or sell more product due to cross selling opportunities, reduced competitive pricing pressure and increased brand marketing.
The general rule of thumb is that the greater the amount of synergies the more the value and the more the Buyer can afford to pay. However, extracting the value of those synergies is quite another story. The savvy Buyer will never disclose the source of the synergies, let alone the value of such synergies. So how are you, the Seller, going to estimate the value of such synergies, which is the first step in executing a negotiating strategy which will reflect the value of the synergies in the price of your business.
As seen in the illustration below, the Normalized or Recasted EBITDA (i.e. adjusted for such items as owner’s excesses and one time events) of the Seller’s business is $2,000,000. Applying a 4X EBITDA multiple, a typical multiple for small businesses with little to no growth which are purchased by financial buyers, yields a price of $8 million. On the other hand, Strategic Buyers often pay multiples of 5 to 8 times EBITDA, depending on the magnitude of the synergies. Because of the synergies, the Strategic Buyer can justify paying a much higher price while still achieving their required return on equity (ROE). Let’s be clear, the required ROE for the Strategic Buyer is the exact same as that of the Financial Buyer. The only difference is that the Strategic Buyer, because of the value of the synergies, can afford to pay a higher price while still achieving the required ROE. Of course just because he can afford to pay a higher price does not mean that you, the Seller, will be able to negotiate such a premium price for your company.
Let’s look at an example. In our example, the synergies which can come from various areas such as cost savings, increase in sales from cross selling, technology benefits, etc., are estimated to be $1.0 million, which results in an adjusted “Synergistic EBITDA” of $3.0 million. Applying the same 4X multiple now results in a value to the Strategic Buyer of $12 million, the “Synergistic Value”, a 50% premium over the “Financial Value” of $8 million. Your ability to get the entire value of the synergies depends upon your negotiating skills. Chances are that the Negotiated Price will end up somewhere between the Financial Value and Synergistic Value. Your ability to negotiate a premium for the sale of you business will depend on several factors including your confidence in the estimated synergistic value.
So how are you, the Seller, going to determine the value of the synergies and once determined how are you going to extract the entire Synergistic Value of $12 million, $4 million more than the Financial Value? As stated in the prior article, Selling Your Business to a Multi- Billion Dollar Acquirer, the prudent Buyer will not disclose the nature of their anticipated synergies to the Seller. The Buyer’s mentality is that they are enabling the resultant increase in value. As such, it is their objective to keep all of the incremental value emanating from those synergies. In the next articles we will explore how to obtain a premium price for your business by extracting the value of the synergies.
PICTURE: Scott Waxler with Becky Quick, Co-Host of CNBC’s Squawk Box, after winning the Deal Maker of the Year Award