Choosing the way you position your business for sale is key to getting the best deal, says CRAIG ALEXANDER RATTRAY
In recent articles I have written about how to build value in your business and various things that can be done to increase its value and position it better for sale. That is all great in theory, but who is going to buy your business? A lot depends on the size of your business, the market it serves and its growth prospects.
Many business owners like to think they can wake up one morning, decide to sell their business and in a matter of months they will be sailing off into the sunset.
Sadly, it very rarely works like that. Preparation is key and a significant part of that is how to position your business for sale.
An often-overlooked area is the ‘strategic buyer’ who is less focused on current profitability, the size of the business now and the markets it is currently selling to.
Whilst a financial buyer is more focused on the profitability, future maintainable earnings and cash flow, the strategic buyer approaches acquisition thinking about synergies and looks for businesses that fit well with their own. This includes companies with complementary products or operating in different markets and locations.
The strategic buyer is interested in how the target company fits into its existing business, and how it can help in the achievement of the company’s strategic goals. The financial position is of less importance.
Strategic buyers acquire companies that provide key supplies (vertical integration), companies that provide new markets or products (horizontal expansion) and competitors, as well as allowing them to remove weaknesses in their position.
This means that the strategic buyer is more likely to pay a premium price and think of it more from the position of what it is worth to them rather than purely a multiple of profit. They are also prepared to take a longer-term view with respect to time to achieve synergies and the full benefits of ownership.
Remember, it is strategic focus, not a financial focus.
Generally, strategic buyers are larger (five to 20 times the size) and have a wider reach and significantly more resources. They are also more interested in longer term returns and have a much further outlook than a typical financial buyer.
Think about what your business could do with their resources and under their ownership.
A mistake I have seen many businesses make is trying to do too many things in too many markets, areas and locations. They spread themselves and their limited resources too thin and fail to achieve very much and instead have a poor business across many different areas.
Many successful businesses focus on a much narrower range and use their limited resources to completely dominate and be the leader in a small niche.
They prove that this can be done with limited resources, and prove the concept for the strategic buyer to take advantage of.
While this not only proves the concept, it usually means that the strategic buyer is prepared to pay a premium for the business, not only because they see the opportunities that can be achieved through their much larger infrastructure, but the additional synergies that can be achieved too.
‘It is not necessarily about selling more of your product. It may be that by having your product alongside theirs that they can sell more of their product’
So, how do you position your company for purchase by a strategic buyer?
Think of the market you service. Think of complementary products and services. Think of other geographies.
Who are the companies that are operating there?
Who would create opportunities, and be able to take your products and services, and sell them through their network alongside similar products and services?
It is not necessarily about selling more of your product. It may be that by having your product alongside theirs that they can sell more of their product. Your product could be the thing they need to achieve that boost.
I am working with three different clients who know who their strategic buyer is, and we are very much focused on doing the right things to position ourselves in the right way.
The difference in exit proceeds of getting this right is huge.
Remember, if you want to maximise exit proceeds, think strategic buyer and look at your business through the strategic buyer’s eyes.
You won’t be disappointed.
Craig Alexander Rattray’s column on issues affecting owner managers appears on alternate Mondays