December 19, 2022
Don Krier, Woodbridge International Managing Director
If I had a penny for every time a business owner has said: “Help sell my business”, followed swiftly by “How much is my business worth”, I’d be happily retired on my dream yacht by now.
Throughout the 30 years I’ve been helping entrepreneurs sell their businesses my answer to this question has remained the same: if you want to sell your company fast, and sell your company for the highest market value, stop thinking about what you want out of the deal.
Instead, you need to think about what a buyer wants from the business they are acquiring. These factors will ultimately determine what your business is worth, because a company’s value is largely dependent on the buyer’s evaluation of the business and their vision of what they can do with the business going forward.
That’s not to say your company’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) rating is not important. A business’ EBITDA calculation is generally the gold standard used by buyers to establish what your business is worth.
However, any experienced mergers and acquisitions advisor will tell you that the buyer’s vision for the company is the ultimate deciding factor because, when it comes to M&A, the old adage of “beauty is in the eyes of the beholder” applies.
Therefore, to prepare your company for sale you need to understand what different types of buyers find “beautiful” and structure your value proposition and confidential information memorandum to capture your ideal buyer’s eye.
Woodbridge International has facilitated the merger and acquisition of hundreds of mid-sized companies since 1993, so I can confidently say we have a great understanding of the different types of buyers, how they think and what they look for in a new business acquisition.
Here’s what you need to know about buyers to help sell your business with ease, and for the best market value.
Buyers can broadly be broken down into three sub-types: the Data-driven Buyer; the Premium Buyer; the Outlier Buyer.
This buyer will spend a lot of time studying the company’s historical information in detail, with a focus on past performance.
What they’re really thinking when wading through all this data is: “what will make this business grow?”; “what new market opportunities are there for this business?”; “are there unique selling points that can be harnessed for growth?”.
If the Data-driven Buyer can’t find the data to prove there is ample opportunity for business growth, they will probably walk.
Give them all the required data, and then some! In addition to the standard financial reports and the information used to calculate your company’s EBITDA, I always strongly advise business owners to disclose absolutely everything during the due diligence process. This is especially important for the Data-driven Buyer, because if there is a skeleton hiding in a closet he/she will find it and the deal will be dead in the water.
This buyer is also interested in your business’ historical information and past performance, but the Premium Buyer is viewing this data through a different lens: what can they bring to the company that is new or different to enhance and grow the business?
The opportunities a Premium Buyer will look for vary, but will likely focus on unique or promising technology and/or patents. The Premium Buyer will also be on the lookout for any other factors that could lead to significant business enhancements, which will ultimately grow the business’ market share and/or increase profit margins.
Disclose all information during the due diligence process, including information you may consider to be “negative”, as Premium Buyers may view these so-called failings as growth opportunities.
For example, you may have launched a new product line or a new service 10 years ago that didn’t deliver returns so you canceled it. But maybe you were onto something and the market conditions just weren’t right at the time. The eagle-eyed Premium Buyer will be on the lookout for opportunities just like this during the due diligence process.
Importantly, when preparing your confidential information memorandum for a serious buyer make sure to highlight any potential areas for growth and/or higher revenue yield, as well as any potential areas for cost cutting.
These may include:
This type of buyer is a rare but rewarding breed, as they will typically pay 20% to 50% more than the next closest bidder for a company that they see a unique value in.
Here’s a quick story on a recently closed deal to illustrate: our client was a $12 million, membership-based consulting company generating around $2.5 million of adjusted EBITDA. The owners wanted a minimum of $15 million for the company, which we felt was obtainable owing to their growth, recurring revenue and niche. Woodbridge International brought the company to market and obtained 44 bids. The winning bid was an Outlier Buyer who bought the company for $32 million in cash – a 13x multiple of EBITDA.
The buyer was a payments processing business owned by a $64 billion private equity group. While we were of course thrilled that Woodbridge International’s competitive bidding process resulted in double what anyone else would pay, this buyer brought to the table opportunity that no other buyer had. They clearly saw a path to generate tremendous additional revenue and had to have the business. Hence, they paid handsomely for the opportunity.
Herein lies the catch with Outlier Buyers: it’s almost impossible to predict which deal might attract this type of buyer; therefore it’s difficult to prepare a company for sale to the lesser-spotted Outlier Buyer.
The Outlier Buyer’s unpredictability makes it almost impossible to prepare your business for sale for this type of buyer. The only thing a business owner can do is to focus on what makes your company unique and avoid comparing your business to others, which is something we encourage all our clients to do regardless of what type of buyer they’re looking to attract.
Making your business’ unique selling points clear from the get-go is your best bet to attract an Outlier Buyer. Conversely, presenting your business as “just the same” as another recently sold company in the hopes of getting the same eight-figure deal is, in my experience, a deadly trap, as no two businesses are the same.
Sure, from the outside two companies can look the same, but beyond that point they can vary dramatically. I have lifted the hood on hundreds of companies over the years and I can assure you that no two companies offer the same unique selling points and therefore the value of each will differ.
Any astute buyer (Data-driven, Premium and Outlier) will know this. And instead of sealing the deal, comparing your company to another high-yield company sale will likely dilute your unique selling points and deter any potential Outlier Buyers.
During the course of our 30 years in the M&A business Woodbridge International has seen thousands of bids for companies we’ve brought to market. We are constantly reviewing and hearing from buyers about how they value a business. What we’ve learnt is that all types of buyers have two common denominators when it comes to deciding whether or not to acquire a business:
While EBITDA calculation is a large component in determining a business’ value, it is not the be-all and end-all for buyers.
More than once we’ve had two businesses in the same industry with the exact same EBITDA calculation that have sold at totally different prices. One company may sell at six times EBITDA, while the other sells at seven times EBITDA.
The difference? The higher selling company had more growth opportunity and less risk due to factors such as less customer concentration, better management and stronger marketing capability.
The history of a company is important to all buyers, but not as important as where the company is positioned to go in the future. Because all smart business buyers are, ultimately, buying for the future.
The key take-away from all of this is: while the best M&A firms have the experience to help you prepare to sell your business to all types of buyers, the only way to test your business’ true value range is to undertake thorough competitive market testing.
Woodbridge International’s strict 150-day deal timeline is designed to bring in multiple bids, averaging 20-40 written bids per company we bring to market. The more buyers we go to, the more bids your company will get, which creates a competitive environment. This competition drives up the sales prices, improves the terms and provides you with the highest value deal and best fit.
Because, at the end of the day that’s what the best M&A firms are here to do: get you more buyers and more bids in order to secure the highest price and the best-fit buyer for your company.
Take a deep dive into how Woodbridge International’s tried-and-tested ‘More Buyers, More Bids, Higher Price, Better Fit’ strategy works.