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Mergers and Acquisitions Best Practice

Maximizing Value when Selling a Business

by John Gilligan

Executive Summary

  • Advisers advise, principals decide. Advisers may not understand industry-specific risks and are therefore badly placed to make judgments on some risk issues. Be prepared to debate with your own advisers and to overrule them if your knowledge is superior, no matter how much they are being paid.

  • Don’t buy a dog and bark yourself. Corporate sales are complex and risky. Appoint experienced advisers and get them to manage the process under your control.

  • Information. The importance of information cannot be overemphasized. Buyers are motivated by fear and greed: The quality, tone, and flow of information critically impact both motives.

  • Valuation. Agree what the walkaway price is with your advisers before starting a process, review it constantly, and be prepared to walk away if necessary.

  • Competitive tension. The best deals are achieved where more than one buyer with cash (but not an uncontrollable host) wants to purchase a business. Use this rivalry to maximize the bids received and to eliminate risks that might prevent the buyer from delivering the deal.

  • Blunderbuss versus rifle shot. Most businesses have a limited target population of buyers who may pay a strategic premium. The approach when marketing needs to favor those most likely to pay the best price.

  • Financial bidders are active. In the past 20 years more businesses worldwide have probably been sold to private equity firms than any other type of acquirer. Use them to create competitive tension.

  • Auctions have to be managed. Theory and practice suggest that many tactics in auctions are counterintuitive. Think through what you are going to do and clearly communicate it to potential purchasers.

  • Say nothing. There are always matters that are uncertain in any deal. Staff are always unsettled by uncertainty. It is best to say nothing at all to them, but if you do decide to explain what is happening, you must be completely honest. But remember, any ambiguity is interpreted negatively.

  • Only the fittest survive. Transactions are long and often tedious. Do not let boredom, fatigue, or lack of patience deflect you from your final goal, especially when the winning line is near.

  • The one that got away. The world is full of people who nearly did the best deal ever. To achieve success, you need to give and take; it is not a war, it is a negotiation.

Introduction

All corporations seem complex to those looking in from the outside. The cocktail of relationships, contracts, and assets coming together to generate value is different in every company, and the process of realizing the value embedded in that cocktail requires planning, foresight, and pragmatic judgment. Failure to sell a business that has been publicly put up for sale can destroy huge amounts of value. Each situation is unique and no text can provide a comprehensive guide, any more than you could write the complete guide to sailing in all weathers. This article will deal with general principles and strategies, not technical details. Furthermore, it will address the question of how to sell a business, not why you should sell a business.

Advisers—What They Do, What They Don’t Do

It would be perverse not to believe that corporate finance advice is valuable. Here is one casual, empirical data point that supports this view: Private equity firms, many themselves ex-corporate financiers, and whose core business is buying and selling companies, almost always use advisers. The question is not whether to appoint advisers; it is what should they be tasked with doing, and what is the limit of their role. Their role is not to make decisions. They are there to limit the number of decisions the vendor has to make regarding the key commercial factors that make deals happen. Good advisers should be prepared to debate decisions and use their experience to guide their clients toward the paths of least resistance. However, only the owners can make the final decisions.

Having described what advisers don’t do, the natural question is: So what do they do? The answer to this is—pretty much everything except making the final commercial decisions. Expect advisers to prepare, collate, and analyze data that will be presented to potential purchasers. They should project manage every aspect of the sale process, providing a clear and coherent strategy to achieve a successful outcome with an acceptable level of risk. This is the necessary skill set of any adviser and it enables the company to concentrate on delivering to its customers, not preparing itself for sale. As the saying goes, “Don’t buy a dog and bark yourself.”

The added value in corporate finance comes in three ways. First is the ephemeral thing called judgment. As one partner of a major British practice used to describe it, having a good “bullshit detector” helps. Second is the ability to take the burden away from the client. Advisers should do all the heavy lifting, leaving their clients to concentrate on the business itself and the key decisions. Finally, and of crucial importance in many deals, advisers need to be able to access the right people in the right places who may wish to acquire the business.

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Further reading

Books:

  • Brealey, Richard A., and Stewart C. Myers. Principles of Corporate Finance. 8th ed. New York: McGraw-Hill Education, 2005.
  • Gilligan, John, and Mark Wright. Private Equity Demystified—An Explanatory Guide. London: Institute of Chartered Accountants in England and Wales, 2008.
  • Glover, Christopher G. Valuation of Unquoted Companies. London: Gee Publishing, 2004.
  • Horner, Arnold, and Rita Burrows. Tolley’s Tax Guide. London: LexisNexis (published annually).
  • Klemperer, Paul. Auctions: Theory and Practice. Princeton, NJ: Princeton University Press, 2004.
  • Wasserstein, Bruce. Big Deal: Mergers and Acquisitions in the Digital Age. New York: Warner Books, 2000.

Article:

  • Akerlof, George A. “The market for ‘lemons’: Quality uncertainty and the market mechanism.” Quarterly Journal of Economics 84:3 (1970): 488–500.

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