13 Sep Negotiating a Premium for Selling your Business
Negotiating a Premium for Selling your Business can take huge amounts of preparation well beyond the presentation. Many Buyers are significantly larger than the Sellers, they have made many deals and have a team well-trained team in all areas of M&A to assist them in doing so. With this basic knowledge known to most Buyers, it can be easy for many Sellers to be prey if they aren’t prepared for it.
The ultimate way to getting the highest premium for selling your business is not always the craft presentation of valuable assets and opportunities as these are rarely presented in an optimal fashion. The most critical aspect of negotiation when your selling to a strategic buyer is dependent on your understanding of the Buyer’s business operations and their determination of the value of synergies created by the merger of the two entities. Many people seem to relate to the term 1+1=3. What is suggested by this is the sum of all parts when combined exceeds the total of the individual parts when they were separated. The value in which the former exceeds the latter is the result value of the synergies.
The synergies can either come from the cost or revenue side of the equation. On the cost side of the equation, a consolidation of all operations usually comes with a huge opportunity to reduce overhead. Examples of cost-cutting methods are closing duplicate locations, eliminating redundant jobs, an increase in purchasing power and reduced part numbers. On the revenue side of the equation, there may be an opportunity to increase prices or sell more products with the increase in cross-selling opportunities, increased brand marketing, and reduced pricing pressures.
A general rule of thumb is the greater the synergies the more value and the more a Buyer can pay. Extracting the value of these synergies is another story though. A savvy Buyer will not disclose the source of the synergies or the value, so how do you, the Seller, estimate the value of these synergies because it is the first step in utilizing a negotiating strategy that reflects the value of the synergies for your business price.
As shown in the example below, the Normalized or Recasted EBITDA (IE. adjust for items like owner’s excesses and one-time occurrences) of a Seller’s business is $2,000,000. By applying a 4X EBITDA multiple, a typical multiple for businesses with little to no growth which is bought by buyers generates a price tag of $8 million. On one hand, Buyers often pay multiples of 5 – 8 times the EBITDA, depending on the magnitude of synergies. Due to the synergies, Buyers can usually justify paying a higher price while still achieving their ROE (Return on equity). To be clear the required ROE for a strategic buyer is exactly the same as one for the financial buyer. The only difference between the two is the strategic buyer can afford to pay a higher price while achieving their targeted ROE because of the value of synergies. But just because they can afford to pay higher doesn’t always mean that will happen.
Here’s another example. Synergies that can result from areas like cost savings, technological benefits, increase in cross-selling opportunities, etc. are estimated to bring in $1 million which results in a “synergistic EBITDA” or $3 million. By applying a 4X EBITDA multiple it now results in a value of $12 million to a strategic buyer, the “Synergistic Value” is a 50% premium over the financial value of $8 million. In order to get the entire value of synergies, it all depends on your negotiating skills. The changes are that the negotiated price ends up somewhere between the Synergistic Value and the Financial Value. Several factors are dependent upon your ability to negotiate a premium for selling your business one of which is your confidence in the estimated synergistic value.
|Financial Buyer||Strategic Buyer|
|Value of Synergies||N/A||Value of Synergies||$1,000K|
|Normalized EBITDA||$2,000K||Synergistic EBITDA||$3,000K|
|Financial Value||$8,000||Synergistic Value||12,000K|
|Buyer’s Initial Offer||$7,000||Buyer’s Initial Offer||$7,000K|
|Negotiated Price||$8,000K||Negotiated Price||$10,000K|
|(+/- 10%)||(+/- 20%)|
So how do you, the Seller, determine the value of synergies and how are you going to use that value to extract the entire Synergistic value of $12 million, which is $4 million more than the Financial value? As previously stated in another article, sell your business to a multi-billion dollar acquirer, the buyer won’t ever disclose the true nature of the synergies to the Seller. The Buyer’s mindset is that this will increase the value and it’s their goal to retain all incremental value emanating from the synergies. In the next articles to follow we’ll be exploring how to get a premium price for selling your business through extracting value of synergies.
PICTURE: Scott Waxler and Becky Quick, The Co-Host of CNBC’s Squawk Box, after winning the Deal Maker of the Year Award
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