Three quick ways to improve the value of your company
Maarten Wolleswinkel, Partner, Oaklins, Amsterdam
Many business owners are drawn into a sales process without decent preparation. A potential buyer knocks on the door and promises a knock-out offer and a smooth, exclusive process. Before you know it, you're headed down a bumpy road. Sounds familiar? Here’s what you can do when you find yourself on this less than ideal route and want to improve the outcome.
Understanding a multi-offer process
Although a structured sales process with multiple buyers always offers a better selling price than a private one-on-one process, many business owners are still tempted by the private approach. Often initiated by a private equity firm or strategic buyer who seems to know your industry well, they promise to act fast, keep the process strictly confidential and offer a premium price. There are only a few credible reasons for entering into such private negotiations, one being that you are an experienced seller and know when you are offered a premium valuation. In the event that you don’t sell, nothing happens and you simply keep the asset in your portfolio if the offer price is lowered. The other is that your company has excellent reporting in place with monthly financials and KPIs and a realistic forward-looking budget so there is no need for extensive due diligence work.
There are also less credible reasons for entering into private negotiations, such as answering the questionnaire of the buyer’s advisors to save vendor due diligence costs, or wanting to save investment banking costs and time by not having to write a bid book or approaching multiple buyers at the same time.
Nevertheless, if you do choose to enter into a private process, make sure you have exchanged the right key financials and other important information, met several members of the buyer’s team and received a non-binding cash and debt-free offer (the Enterprise Value). You might be at the start of lengthy exclusive negotiations and due diligence efforts that reveal the non-perfect parts of your business. Now it's important that you stay in control and perhaps even improve your proceeds from here.
A buyer never offers his final price during the first round of negotiations. There is always a bandwidth of at least 5—10% to improve.MAARTEN WOLLESWINKEL
Negotiate like a pro
While the offer may look good on paper and you don’t want to scare off the buyer, you also want to maximize the proceeds from a potential transaction. When this happens, you can use a combination of three strategies to improve an offer:
- Reject the offer and ask for more
- Optimize the transaction structure
- Clean your balance sheet
Reject the offer and ask for more
After having closed hundreds of transaction, we can guarantee you that a buyer never offers his final price during the first round of negotiations, especially in a private negotiation setting with no competing bidders. There is always a bandwidth of at least 5—10% to improve. There are a few ways you can negotiate a higher price. You can make the valuation discussion more objective or neutral by sharing information about higher valuations/multiples being paid for similar companies or similarly-quoted companies. Another strategy is to calculate the potential synergies of the deal and ask for your share of it (e.g. 50%). Alternatively, you can share “new” facts about your company that justify a higher valuation, such as large contracts being signed, recent performance above budget, etc.
Optimize the transaction structure
Most sellers do not realize that experienced bidders have a wealth of tools to reduce the price without changing the wording. You get offered a “cash and debt-free” Enterprise Value instead of a price for your shares. There are also a few other ways to defend the price for your shares and put yourself in a better position. In a letter of intent or term sheet you can define how the Enterprise Value leads to the Equity Value. Based on the intended takeover balance sheet, agree to the following:
- All cash will be added to the price for the shares (it is not trapped cash)
- From the takeover date until closing (when you get the money) you get paid additional interest that is similar to the cash that will be generated in this period
- Only interest-bearing debt will be deducted and not debt-like items like leases, holiday provisions and working capital adjustments
Another line of defense is to define in the letter of intent exactly which assumptions and what information form the basis on which the offer has been made and carefully evaluate if these assumptions could raise problems at a later phase when they prove to be overly-optimistic or even invalid. Last but not least, share the “bad things” before an offer is final and reduce the risk of renegotiation based on skeletons in the closet.
Clean your balance sheet
Many companies have so-called non-operational assets. These assets are often not valued in a takeover bid since most offers are cash flow-based or based on a multiple on recurring earnings before interest, tax and depreciation & amortization (EBITDA). The best way to create quick wins that immediately increase your proceeds is to exclude non-operating assets from the deal, unless a buyer is willing to pay extra for them.
Typical non-operating assets are:
- A plot of land that could be used for future growth
- Loans that have been granted to related companies (buy them from the business that you sell and add the cash to your cash-free proceeds)
- Holiday homes (for brainstorming meetings) and boats (for inviting clients) :)
- Participations in other unrelated businesses
As the buyer’s toolbox to renegotiate an offer is extensive, a short exclusivity period is very important. Make sure that you agree ambitious timelines for due diligence work and that you get a weekly update from the buyer. This should confirm that up until that moment, he is not aware of any facts or circumstances that could materially impact the agreed value of the deal. In the end, this will help you to get a better deal.
Our commitment and integrity towards every deal gives you an unbiased opinion on a variety of financial matters. Contact us if you’d like to discuss your options, confidentially, with an experienced advisor.