I’ve heard first-time CEOs tell me they’re going to manage the sale of their company themselves. I’ve also heard experienced CEOs who are veterans of multiple successful exits tell me that they would never manage the sale of their company on their own, and that they will call in bankers either to start a process or react to inbound interest. Why does the experienced executive prefer to get professional help? And what are the advantages that the first-time CEO hopes to gain from doing it himself or herself?
Selling a business is vastly different from selling real estate. The value of the business is largely intangible. The value of a technology business is almost entirely intangible. Almost every real estate asset has a rich set of comparables, a history of transactions, and a very visible concrete set of attributes that determine value. However there are some similarities.
When you drive past a house with a “for sale by owner” sign staked in the front lawn, what is your first thought?
“I could probably buy it cheaper than if it was represented by a broker.”
The experienced CEO never wants to sell based on price. They want to differentiate their offering, call out the premium aspects of the business, create the perception of high value, and command a good price. As soon the customers view them as the low cost provider, then the price plummets as the perceived value plummets.
So that is the first problem with the “for sale by owner” sign- the problem that an FSBO sign out front implies that it will be cheaper. Indeed, the FSBO seller will save 3 to 6% on broker fees – but a properly run process can move the valuation up by 10%, 20% or 30%. So by taking the shortsighted approach of putting up a FSBO sign, the seller is giving up significant value and will now be negotiating against an expectation that they’re willing to take less.
The second problem with a “for sale by owner” listing is that a potential buyer wonders, “what is wrong with this house?” If every other house that is sold in the neighborhood was represented by a reputable broker, then at least a buyer has the comfort of knowing that in those cases the broker looked at the property, advised the owner on things that need to be fixed, and gave them good advice on pricing so that the listing feels proper and is well placed in the context of the local market. A FSBO seller, even if they are a real estate agent, does not offer that surface polish that is delivered by the real estate broker.
Both of these dynamics apply in corporate M&A. The CEO who is calling on potential buyers directly, to generate interest and negotiate a deal, is in a very awkward position. They are clearly not objective nor disinterested. A polite buyer will worry about insulting them by giving them direct and useful feedback, because he or she will be negotiating with their potential employee. Also, the CEO will likely not have a sophisticated view on valuation and will either have unsupportable aspirations, which makes for a short conversation, or will be selling cheap, which is unfair to the shareholders.
Working with a banker also gives buyers comfort that somebody with M&A experience has looked at the company and identified major problems. Even if this review falls short of full-blown vendor diligence, it will still have value. A banker will have looked at the financials, product and pipeline and used that data to inform their views on valuation.
Finally, M&A deals are complex, nuanced, and highly dynamic. An inexperienced seller will potentially fall into traps that an intermediary could have avoided.
Let’s look at a examples. In an asset deal, buyer and seller negotiate the asset allocation and, under current tax rules, are required to report consistently on both sides of the transaction. For the seller, fixed assets will be subject to sales tax and, if the seller is a pass-through entity, inventory will be taxed as ordinary income at the shareholder level – a potential disaster for shareholders in a high tax bracket.
In a stock deal, there is always drama around the balance sheet. We are currently working on a deal that will close near the company’s fiscal year end. They have historically distributed $2 to $3 million in shareholder dividends at year end. Unless the balance sheet is explicitly addressed in the term sheet, a buyer could include that cash in their calculations and deliver millions less at closing than the seller expected to receive.
Chances are your acquirer will have made multiple acquisitions or investments in the past, and will have all of that experience on their side. Sellers should ally themselves with an experienced team that can bring similar experience and expertise to bear.