By Guy Rigby, Head of Entrepreneurs at Smith & Williamson
Getting the right offer for your business will require excellent negotiating skills and a good dose of psychology. The price you eventually receive will be affected by scarcity, demand, emotion, vision and competitive tension. This is a potent mixture and the sell side objective must be to get the buyer to the point where it would be an unmitigated disaster if he lost the opportunity to someone else.
According to Brian Livingston, head of mergers and acquisitions at Smith & Williamson, the process is likely to involve the creation of a storyboard. “A storyboard will lay out, in four or five simple slides, how the business is positioned and where it’s going”, says Brian. “That storyboard is then adopted by the buyer, who is quite busy, so he/she presents your truth as his/her truth.”
By giving the buyer your vision, they will start to champion your sale, making it easier to achieve your price.
It’s important to get any bad news on the table at the outset. So if you’ve got a particular problem in your business, don’t hide it. Get it out in the open along with your thoughts as to how the issue can be addressed. You will not only impress your prospective buyer with your honesty, but also avoid potentially damaging and price cutting disclosures later on.
“Don't tell everybody all the good news immediately. Tell them as much of the bad news as you can,” recommends Brian. “For example, if your factory is ugly, and the buyer only sees it after he’s made his offer, you're liable to lose the price. However, if you've told everybody the bad news up front, say by sending a video clip of it round as part of the information pack, then they can't reduce the price for something they already know. You can combine that with the fact that actually you've won quite a nice contract. So when the offer first comes in, you wait a little while and then you tell them something like [i]‘we've just won a new contract (which gives us permission to increase the price)’.
This is not to say you hide anything, just that you reveal a key strength as a tactic to negotiate the price up rather than giving the buyer ammunition to drive the price down (as is often the case) by trying to sweep the weaknesses under the carpet.
“It’s always better to reveal your flaws,” says James Caan, successful entrepreneur and CEO of private equity firm Hamilton Bradshaw. “Because they'll come out during the due diligence process anyway and if they uncover them before you explain them, they'll think you were trying to hide them. It also allows you to have the conversation about the negative things on your terms.”
Revealing your weaknesses needn’t be negative. In many ways it can focus the buyer on the (positive) things that he can do to improve the business, creating an even bigger opportunity to add value.
“If you are so good at absolutely everything, how can the buyer improve the business?” asks Brian Livingston. “You've got to leave something on the table for somebody else.”
Here are some ways to maximise your selling price:
- Build empathy with the buyer. Tell them your vision and how they, rather than you, can achieve it. Change the focus so they become the champions of the deal, rather than you.
- Be open and transparent. Tell them the bad news and how it can be fixed. Don’t let them make price-adjusting discoveries later on.
- Set your minimum price. Discuss your minimum price with your advisers, but make sure you both agree. There’s no point in wasting your or their time if price expectations are unlikely to be met.
- Wait for the buyer’s offer. Don’t disclose your price. Ask the buyer to make an offer. “In any negotiation, it’s always beneficial to have the other party reveal their hand before you do,” advises James Caan. “If you can get your buyer to put a stake in the ground early, you know where they stand and it then allows you to react accordingly.” Brian Livingston agrees. “Never tell the party the number because, if you do, they’ll think it's a ceiling, not a floor. For example, a client of ours wanted £20m, but I advised him not to say a word. The first offer was £37m and we settled at £42m.”
- Make sure your price allows for a win-win. “The most important thing for both sides to understand is that there has to be something in it for the other party,” advises Jonathan Hick, founder of Directorbank. “You've got to push it as far as you can and as far as its worth, but don't be greedy. Deals fall down because people are greedy.”
- Focus on future value as well as existing value. “The buyer will say I believe it's worth this today,” says Jonathan Hick. “So persuade them to pay you some of tomorrow’s value too. You've got to see what you can negotiate.”
- Create competitive tension. If there’s interest from more than one party, the value will often be driven up. “If you can run a controlled auction and have competition, either real or perceived, you tend to maximise the value,” says Brian Livingston.
- Maintain good relations. Don’t fall out with the purchaser. When difficult issues come up, use your adviser as your gladiator. You will probably have to work with your buyer, at least for a while!
- Be flexible. Make life easy for the buyer and help him achieve his goals.
If you are thinking about selling your business, contact Guy Rigby on 020 7131 8213, or email firstname.lastname@example.org.
By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.
Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.
Smith & Williamson Corporate Finance Limited
Authorised and regulated by the Financial Services Authority. A member of the London Stock Exchange. A member of M&A International.
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