Once a decision to sell a business has been made, ensuring that the proper approach is selected to conduct the sale is very important.
Choosing the wrong method can expose your company to unnecessary risks. The different approaches to a company sale can be organized into four types: auctions, controlled sales, targeted sales and private negotiations.
This type of sale casts the widest possible net and invites anyone and everyone who is qualified to consider purchasing the company. If you are not clear on who would make an ideal buyer, the auction puts that question to the marketplace, letting bidders decide if they want to proceed and how much they want to pay. It can also create a sense of urgency among bidders which in some cases could lead to a higher final price being paid.
This type of sale does come with risks, too. As soon as the auction is announced, everyone will know that your company is for sale. Key employees may be concerned about their future prospects and begin looking for other work. Suppliers may decide to stop offering credit terms in anticipation of a new owner. Customers may also decide to start looking for other companies to do business with just in case the new owners don’t perform as expected. Competing companies may also take this as an opportunity to perform due diligence on your business. It’s important that you anticipate and prepare for these responses to the announcement.
In a controlled sale, a list of financial and strategic buyers that have an affinity for your company is compiled. These companies are then contacted directly about the opportunity and the sales process begins. A controlled sale has the benefit of maintaining a modicum of confidentiality compared to a public auction, but still has the same risks, albeit to a somewhat lesser degree.
In a targeted solicitation, a “short list” of potential buyers is identified and contacted directly, usually at the executive level. The benefit of a targeted solicitation is the speed with which a sale can take place, usually reducing the transaction time by 60 to 70 percent.
This speed does come at a cost. The reduced number of potential buyers means that the maximum price may not be realized. Typically, a seasoned advisor with experience in your company’s industry should already have a short list ready. They should also have the necessary relationships in place to make informal inquiries to potential buyers regarding their level of interest.
This is usually conducted when a company or individual has previously expressed interest in buying your business and is contacted directly to negotiate. The trend continues in this case. The benefits are speed and confidentiality but the sale price will almost certainly be less than what would have been generated in an auction, controlled or targeted sale.
Choose wisely and be patient
Selecting the appropriate sale strategy is essential for maximizing the sale price and minimizing the disruptions to your business. The process can vary from a few weeks to the better part of a year depending on the nature of the negotiations, the degree of interest and the flexibility of the parties.
Resources for further research
The following online resources have information on financial statistics and business valuations for private companies. Not all of the information is up to date, but given the difficulty in finding accurate information for non-publicly-traded companies, it’s a good start.
- Inc. 2010 Business Valuation Guide - Filled with recent data and trends.
- BizStats - database of industry multiples, ratios and averages.
- Yahoo stock screener - for public company comparable values.
- BizBuySell - marketplace for private companies that are for sale.
Mike Periu is the founder of EcoFin Media, LLC an independent producer of financial, economic and entrepreneurial content for television, radio, print and the internet. Over the past ten years he has started three companies and advised over 50 companies on financial strategies including fundraising. Mike also hosts regular small business webinars on a range of topics relevant to business owners.