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Home > Mergers and Acquisitions Best Practice > Maximize the Selling Price of Your Business

Mergers and Acquisitions Best Practice

Maximize the Selling Price of Your Business

by Frederick Lipman

Executive Summary

  • Plan the sale of your business several years ahead.

  • Choose the right time to sell your business.

  • Obtain a professional valuation of your business and then seek to maximize it.

  • Use an investment banker with experience in your industry.

  • Target your marketing to potential buyers.

  • Conduct an auction.

  • Identify impediments to the sale of your business and work to eliminate them.

Introduction

Many business owners make the mistake of thinking that it is simple to sell their business at a good price. The reality is that selling a business is a complicated process that requires advance planning many years prior to the sale target date in order to maximize the sale price. The advance planning steps are covered in detail in the author’s book entitled Valuing Your Business: Strategies to Maximize the Sale Price (Wiley, 2005).

The purpose of this article is to discuss some of the most important best practices which can assist the business owner in maximizing the ultimate sale price.

Take Advantage of Beneficial Fluctuations in the Value of Your Business

It is important to understand the primary drivers of the valuation of your business and to time the sale process to coincide with a period of high valuations. We can divide the valuation drivers into two categories: macro factors such as the state of the economy and your industry, and micro factors which relate to the peculiar aspects of your business such as revenues, business prospects, etc. For example, no matter how well your business was performing in 2009 (the micro factors), this was a bad year to sell your business because of the macro economic factors affecting the entire economy, and very few sales were consummated.

A key to maximizing the sale price is to sell at a time when there is the maximum number of potential buyers. It is important to time the sale so that there are financial buyers available to compete with any strategic buyers. Financial buyers are most likely to be available when the banks and other financial institutions from which they borrow have the most generous lending terms and afford them the largest amount of leverage in making the purchase. If there are a significant number of potential financial and strategic buyers, this will enable you to conduct an auction, which typically will give you the highest possible sale price, as discussed below.

Every business owner should obtain a valuation of their business by a competent professional appraiser even though they have no current plans to sell the business. A well documented appraisal report will help identify the primary macro as well as micro factors affecting the valuation of your business. Such a report will enable the entrepreneur to concentrate on the micro factors such as revenues, EPITDA, business prospects, etc., while waiting for the macro valuation factors to be favorable.

For example, a valuation report may indicate that one particular line of business has a much higher multiplier of value than a second line of business. The entrepreneur might therefore focus more attention and funding on the first line of business in order to maximize the valuation at such time as the macro economic factors became favorable.

Use a Qualified Investment Banker to Help Sell Your Business

An entrepreneur can sell their own business without an investment banker, just as they could sell their own house without a real estate agent. However, while some businesses can be sold without an investment banker at reasonable valuations, most entrepreneurs do not have the background or experience to properly market the business, locate potential buyers, and negotiate deal terms.

The advantages of using an investment banker are as follows:

  • An investment banker experienced in your industry has a greater knowledge of potential buyers for your business than you do.

  • Even if you know one obvious buyer for your business, an investment banker may be able to find one or more other prospects, thereby enabling an auction to occur.

  • The investment banker can help screen your potential buyers and prevent you from wasting your time on financially unqualified buyers.

  • An experienced investment banker can assist in negotiating the sale, smoothing rough spots, and protecting you from unrealistic demands.

A qualified investment banker should be able to add more value to the transaction than the small percentage that they charge as a fee. Structure the fee arrangement with the investment banker to align their interest with yours, such as a higher percentage for sale prices beyond your expectations. It is important that you use an attorney specializing in mergers and acquisitions to negotiate the agreement with the investment banker.

Some investment bankers will not handle smaller businesses and business brokers typically charge very high fees as a percentage of the purchase price if the business is extremely small, such as businesses worth less than $1 million or even $5 million. With these smaller businesses, it may be worthwhile for the owner to try to sell the business before engaging a business broker. Alternatively some lawyers or accountants can sometimes provide all the necessary professional advice, perhaps with a low up-front but incentivized fee structure.

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Further reading

Book:

  • Lipman, Frederick D. Valuing Your Business: Strategies to Maximize the Sale Price. Hoboken, NJ: Wiley, 2005.

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