Getting a Premium Price for Your Company: Make Buyers Compete
This post is the second part of a four-part series exploring how to get a premium price when you sell your company. Be sure to also check out part one: Never Tell a Buyer Your Asking Price.
Make Buyers Compete
In part one of this series, I advised that it’s never a good idea to tell a potential buyer your asking price. So how do you negotiate the best possible offer, without giving away your hand?
The answer: market yourself to multiple potential buyers, so that they are competing with each other. In the investment banking business, we call this an “auction.” When a small group of potential buyers knows that there are other interested parties, the opportunity for gain that initially attracted them can quickly turn into fear of loss – especially if they’re a strategic buyer! Now it’s not “I could buy this company and be better off, or do nothing and stay the same” – it’s “I could buy this company and be better off, or I could do nothing, and my competition might buy them!”
The principle is the same whether you’re selling a company or a house. If only one person makes an offer on your house, and they know they’re the only person, you can’t sweet-talk them into overpaying. When selling your business, the buyers are often private equity funds that are managing millions for their investors. Those funds did not raise all that money by paying more than they had to for companies where there was no competition. On the other hand, when there IS competition, who knows where the value can end up? Beauty is in the eye of the beholder, so let buyers figure out who thinks you are the prettiest.
By the way, the status quo (i.e. “I’ll just keep my company”) is not competition. The average private equity firm will spend $100,000 just to make you an offer and over $1,000,000 in negotiations, due diligence, and lawyers’ fees by the time the transaction closes. The seller who threatens to “keep his company” will only receive half hearted offers for low ball bidders and will permanently taint his company with reputable buyers who actually pay the most. Thus, make the commitment to sell before you offer your company up for sale.
There is no substitute for buyer competition. Effective competition between buyers will get you what the company is worth – and more!