“I just got a shocking offer for my company and I need to respond quickly. Can you come over today?”
I had met Lexi (not her real name) a few years earlier. Her father and I served together on a board at church, and I had admired from a distance the success of his business.
Lexi had been in charge of the business since her father passed away after a sudden diagnosis of stomach cancer three years earlier. I spoke with Lexi at the funeral, but obviously, nothing about the business was discussed. So I was surprised when she called, and I was also surprised by the urgency in her voice.
Lexi owned a manufacturing business, and one of her suppliers was vertically integrating through acquisition. The company’s CEO met Lexi at a conference and threw out a very nice number to see if Lexi might be interested in selling. He told her he was thinking “high $20 million range.”
Lexi is smart, energetic, and interested in doing the right thing by her family heritage. I knew it wasn’t like her to jump at the first opportunity, but the idea of sudden wealth like this was understandably compelling.
So the two questions we discussed at our first meeting were: What’s the right number for her company? Should we respond with a counter or take the company to market and negotiate with multiple buyers?
Lexi gave me her financial data, her organization chart, and her budget for the next year. She also gave me notes from her recent management team strategic retreat. Since the buyer was a publicly-traded company, I had access to a lot of information about them. My objective was to sort through all this data to get a sense of her company’s market value, and perhaps more importantly, how Lexi’s company would fit with the buyer’s strategy.
Three days after that first call, Lexi and I sat down to review my findings. The buyer’s first offer in the “high $20 million range” was compelling. But, I gave Lexi some even better news. If we took her company to market and engaged in a competitive bid process, we were likely to see offers from private equity in the range of 8.5 to 9.5X her 2018 forecast EBITDA, hence bringing the company value to $31 to $35 million.
But Lexi was even more excited when I told her that, after digging into the buyer’s recent acquisition history, I learned they report their acquisitions on a “post synergy” basis. This is often referred to as a “strategic buyer.” They are buying based on financial and strategic logic, and therefore usually pay more than private equity. Knowing that, I prepared a 2019 forecast for how the buyer would look at Lexi’s company if they owned it. The buyer’s efficiency in the supply chain would bring another $1 million to the bottom line. This made me comfortable telling Lexi this particular buyer would likely be willing to pay around $40 million.
I frequently meet with business owners who want their business valued on potential, not what the business has actually done in the past. That strategy almost never works, though I’ve seen many business brokers try it (that’s a topic for another day).
But what I was able to do was understand the deal from the perspective of the buyer: using Lexi’s real financial history adjusted to reflect what that reality would be if the buyer owned the company. This approach only works when the seller (or his/her intermediary) has done their homework to meaningfully understand the buyer’s strategy. To just say “here’s what you could do with the company,” with no precise understanding of the buyer’s strategy or operations, will likely be ignored. But when you get inside the head of the buyer and find a real angle, such as the cost savings they’d realize through the supply chain efficiency, you will likely see your valuation rise.
Lexi’s expected value went from high $20s to mid to high $30s by doing the investigative work to understand the buyer’s strategy and see the deal from the buyer’s perspective. This is how you get your company valued on its forecast. Once you’ve done that, you have some bona fide negotiating leverage, and you might not even need to talk to other potential buyers.
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 . He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The story above is true, but the names and fact patterns above have been changed to preserve the parties’ identities.