It’s a simple but critical point: you always sell something for a higher price if more than one buyer wants it. It’s no different selling your business.
It’s critical to get “competitive tension” into your business exit process to get the best price from potential buyers.
In my last few posts we have looked at the first two “pillars” for getting the best exit deal. In this post we look at Pillar 3: Create a competitive sale process.
Can I fudge it?
You can pretend you have other interested buyers to push up your exit price, but it won’t work. It’s not like a house auction where you are done and dusted on the day of the auction. Business exits take much longer.
No matter what you say or imply, your buyer will always know before your deal is ﬁnalized whether there really are other potential buyers. And once they reach the view there aren’t, shrewd buyers will crunch you on price late in the deal. Having invested a lot of time, money and effort by that point, most business owners cave in and agree to the buyer’s reduced price.
Don’t be shy!
I’ve found over the years that a lot of business owners are curiously hesitant about approaching multiple potential buyers in order to create a competitive sale process for their business.
There are a few common reasons: concern about conﬁdential aspects of their business becoming public, competitors finding out you’re thinking of selling, key staff becoming unsettled or the logistics of dealing with multiple buyers.
Often business owners have been approached by a potential buyer who seems very genuine and they don’t want to “complicate things” by involving other potential buyers. This, of course, plays right into the hands of that initial buyer. (Unsolicited approaches from potential buyers is something I’ll cover in a future post.)
While these concerns do have substance, they are heavily outweighed by the advantage of having a number of potential buyers competing for your business.
Managing “bidders” with a sales funnel
I’m not going to suggest that dealing with multiple potential buyers isn’t more work. It is – but not as much as you might think.
Most of the work you need to do for your business exit will be the same whether it’s for one or a number of potential buyers. The key difference is how you manage information ﬂows and conﬁdentiality.
Think about the sales funnel I’m sure you already use to sell your products and services:
- You start by putting out enough information to attract whoever might be interested in buying your products and services.
- You then bring potential customers who show interest down your sales funnel by providing them with more information about your products and services and responding to queries.
- Many drop off along the way, but a number convert to customers and buy from you.
Dealing with multiple potential buyers in a business exit is very similar: you progressively provide potential buyers with more information about your business as you move through your exit process, until they drop out or you cull them. Ideally, you end up with two or more serious buyers, which creates real “competitive tension.”
A key aspect of your business exit is obviously protecting conﬁdential information as you proceed. By taking a sales funnel approach, you can release information progressively so only serious potential buyers get to see truly conﬁdential information about your business. For larger deals, this is often managed through sophisticated online data rooms.
You must also have all potential buyers sign conﬁdentiality agreements, keeping in mind these can be difﬁcult to enforce in practice.
Using skilled “auctioneers”
Finally, your advisory team is crucial to creating and managing a competitive sale process. A team that is highly experienced in business exits will be well equipped to deal with the logistical and conﬁdentiality issues involved when you have multiple potential buyers.
Even more importantly, they will be skilled at ensuring they build “competitive tension” between potential buyers while pushing back on the sort of tactics experienced buyers often use to extract concessions and unfair deal terms from business owners.