Why do similar companies sell at wildly divergent prices?

Kevin Short is the Managing Partner and CEO of Clayton Capital Partners, a St. Louis-based investment banking firm specializing in merger and acquisition advisement.  Beginning in 2007, Thomson Reuters, FactSet Mergerstat and Investment Dealers’ Digest all ranked Clayton Capital Partners as a top U.S. M&A firm.

Kevin is also the author of, Sell Your Business For An Outrageous Price, published by AMACOM Books in September 2014. This book synthesizes Kevin’s experience in selling mid-size companies ($10MM – $250MM in value) for twice the multiple of the industry average.

BusinessInterviews.com:  Can you talk about the art of understanding the buyers of mid-market companies?

Kevin:  Buyers in the mid-market are either financial or strategic.  Financial buyers use a financial formula (usually based on a desired rate of return) to determine the price they’ll pay for a company.  Strategic buyers base their offers on their perception of future value: how they expect a company to perform under their ownership.

There are four types of strategic buyers:  competitors, verticals, industry players and adjacencies.  As we evaluate each type in the context The Outrageous Price Process™, the art is first to match the competitive advantage of the seller to the needs of the strategic buyer who is active in the marketplace.  The second challenge is to make that strategic buyer aware of the seller (and its competitive advantage) long before taking the seller’s company to market.

Engaging buyers in a way that maximizes sale price is also an art.  It does not take a genius to understand why a buyer comes to the table, but it takes experience, great listening skills and creativity to keep it there and drive the price higher.  In all transactions I work to draw out information and adapt to the wide range of negotiating tactics buyers use.  In the Outrageous Price Process™, however, I also have to make the buyer see how this acquisition will greatly benefit it or how passing on this opportunity has the capacity to cripple it.

BusinessInterviews.com:  What are some trends in the Merger and Acquisition market that you’re excited about or think that our readers should be paying attention to?

Kevin: Abundance.  On the positive side, there is an abundance of capital available (in both debt and equity) to support M&A activities.  That’s quite the contrast to the situation just a few years ago.  In addition, purchase prices today are greater than ever.  On the other hand, we are anticipating a glut of companies to enter the M&A pipeline for two reasons.  First, owners who may have planned to sell when the market was weak, held out for higher prices and are now preparing their companies for sale and entering the marketplace.  Second, Baby Boomers are aging out of ownership in record numbers.  As they put their companies on the market, increased supply will decrease prices so owners should think seriously about the timing of their exits.

BusinessInterviews.com:  Congratulations on your second book, Sell Your Business For An Outrageous Price.  What inspired your writing process and what you hope that the average reader walks away with?

Kevin: For years, I was preoccupied by a nagging question:  “Why do similar companies sell at wildly divergent prices?”  I first noticed the discrepancy as an investment advisor purchasing companies as investment vehicles for clients.  Since my job was to secure the best return, my interest was limited to making sure I wasn’t the one paying the much higher or outrageous price. I define “outrageous price” as one that is at least two times the EBITDA multiple of an average company in its industry.

I continued to see similar companies sell at very different prices as an investment banker for mid-market companies ($10M – $250M of value) across a broad spectrum of industries. I knew that, as it does in all transactions, leverage played a key role in sale price. If the seller had it, the sale price went up.  If the buyer had it, sale price was held in check.

I wondered if could I dissect leverage and then create it for my sellers.  I suspected that the leverage I was seeking related to the relationship between the buyer and the seller. Could the sale process that we use in these transactions produce an outrageous price?

I hope that, when readers close the book, they’ll know that the answer to that question is, “Yes!”  I hope readers will share my excitement about the possibility of not only closing a sale successfully, but also getting an Outrageous Price for their companies.  I hope that when they turn the last page they’ll see their companies and their prospects for sale in a whole new light.

 

BusinessInterviews.com:  What are some of the biggest mistakes you see individuals make when it comes to selling their business?

Kevin: The most common, and usually biggest, mistake owners make when it comes to selling their businesses is the failure to prepare themselves and their companies for the sale process.  Usually that failure is due to some misconception about the process or the players.  For example, some owners expect buyers to see the same value in their companies as they do.  That rarely happens.  In fact, the gap between the seller’s perspective of value and the buyer’s perspective is the main reason transactions fail to close.  Most owners do not understand how professional buyers operate. They neither speak the buyer’s language, nor understand that buyers justifiably expect sellers to back-up every statement they make during the sale process.

A failure of expectations also applies to those owners who don’t realize that the sale process takes an average of 12 months to complete.  In failing to realize that the process is a marathon rather than a sprint, sellers can become so frustrated with buyers’ numerous requests, that they abandon the process altogether.

Another common mistake that not only prevents owners from getting an Outrageous Price, but can be the difference between selling and liquidating is not retaining the best M&A team to represent them in the process.  There are too many wanna-be investment bankers who confuse owners, but who haven’t closed a deal in years.  Beyond that, there are outfits that do nothing more than collect engagement agreements and list companies for sale.  Finally, there are very few investment bankers who know how to position a company for an Outrageous Price and know how to orchestrate the process necessary to get one.  In shopping for an investment banker the motto is “Seller Beware.”

BusinessInterviews.com:   Can you share your top tips when it comes to creating a thoughtful and successful exit strategy?  What are some aspects of the process that business owners often overlook?

Kevin:  The very best thing owners can do when crafting an exit strategy is to focus on creating a management team that will survive the owner’s exit.  I offer this advice to owners who plan to transfer their companies to insiders (family or key employees) or who plan to sell to outside third parties.  Without a successful management team motivated to stay with the company, owners soon find that prospective buyers aren’t all that interested in buying, much less motivated to pay Outrageous Prices.

I remind owners that buyers always focus on minimizing their risk.  Having a management team willing to stay on under new ownership does that, but buyers also want to see a diverse customer base.  Buyers dislike the risk that accompanies a small number of customers generating the bulk of a company’s revenue.  They know that customers can move on when the new owners move in.

Consistent with their desire to minimize risk, buyers want the assurance that comes from excellent financial reporting.  Buyers will sift, sort, test (and likely fold, spindle and mutilate!) every piece of a seller’s financial data.  If they find data to be unsupportable, or even haphazardly collected or reported, buyers will simply move on to the next opportunity.

BusinessInterviews.com:  What unique considerations do family-owned businesses need to take into account when it comes to selling?

Kevin:  While culture plays a role in many transactions, it is a critical consideration when I talk to owners of family businesses.  I will sit down with an owner to talk about how the company has been run: are family members involved in decision-making or is this a one-man show?  There is no right or wrong answer, but if owners have involved family members, they should involve them in the decision to sell.  That said, involving family members takes preparation and a sensitivity to the interests of all the members.  For example, I’ll ask if the owner has made—either explicitly or implicitly—any commitments to family members about future ownership.  If so, we need to talk to those family members and address their concerns before we go to market.

I often recommend that owners (who don’t already do so) retain the services of a consultant skilled in family business issues.  These consultants can play an invaluable role as owners juggle the competing interests of two (or more) generations and of those active and not active in the business.