Forty Million Reasons to Use an Investment Banker to Sell Your Business
Frequently, when it’s time to take an exit, business owners will reach out to someone they know – a vendor, a customer, etc. and put together a deal to sell their business. That’s what business owners do, they put deals together. It makes sense on the surface, but the results are often disappointing.
We recently closed a transaction for a client well over $100M. To some, this is a small business and a footnote in their financials. To others, it’s unimaginably large. The relative size is not as important as what the number might have been and what we can learn from the difference. (I’ll be vague about the details to preserve confidentiality.)
When we first met with our client we learned that they had a relatively simple business that produced good margin and cash flow for many years. The family was ready to retire so they began to explore their options.
There seemed to be a consensus among their advisors that the company was worth a figure that was significant, but well under $100M. Also, everyone had a pretty good idea which company would be the ultimate buyer. The family thought the valuation range was fair, but they wanted to make sure that they got the best possible value for their company. Also, they wanted to be sure that the process would go smoothly so the daily operation of the business wouldn’t be disrupted.
As we made our presentation to the family, we explained that the most important factor in delivering the highest value for their company is a robust competition among potential acquirers.
We began our process with a deep-dive analysis and advance due diligence. We needed to make sure that we knew everything we could about the business to avoid any surprises and to make sure we could promote it as effectively as possible.
With our marketing process, we reached out to hundreds of potential buyers. About half were other companies in related industries and half were private equity firms or family offices. We worked hard to make sure that we built a pool of well-qualified buyers who were motivated to pursue the transaction.
In the end, we received Non-Disclosure Agreements from 47 organizations – a good solid beginning pool. As we continued the narrowing process we received initial offers from 11 companies that had significant interest and wanted to tour the facilities. These 11 companies formed the competitive “market” that we were looking for.
The predictions seemed to be coming true. The buyer that everyone was expecting to win was among the 11. As it turned out, that offer came in right around an even $100M. If our client had worked with them directly, they may have received that value (and been delighted at the windfall over the initial valuation range), but it’s hard to know for sure if they had attempted a negotiation without first creating a good competitive environment.
The final offer came in at well over $100M from a company that no one had considered. We found them as we conducted our early research of the industry. The difference between the initial valuation range and the final offer was more than $40M. As our team finalized the transaction with the buyer, we managed over 500 documents and more than 400 written questions – a process that would have been enormously disruptive to our client’s business had they attempted to handle things “in-house”.
Also, because we did our advance due diligence well, we were able to avoid any last minute “adjustments” to the price during the negotiation process. In this area alone, we saved our client many times the fees that they paid for our services.
Our client walked away with $40M more than they were expecting. For anyone, that’s an enormous amount of money. Fortunately for the rest of us, they are a very generous family so a large portion of it will go to charities.
The “what-ifs” in this case are important to consider:
- What if the family chose to pursue the transaction on their own?
- What if they worked directly with the other company?
- What if they chose another investment banker that didn’t put the same amount of effort into the advance due diligence?
- What if they went with the “usual suspects” and didn’t dig deeply enough to find the company that gave the highest offer?
There is no question – this article is a pat-on-the-back, congratulatory message for my team. However, it’s also a powerful reminder to business owners. You may come up with a few reasons to try selling your company on your own.