Some time ago, we received a call from an owner of an IT company who had been approached a few times by investors looking to bid on his business. The potential buyers saw synergy opportunities with a business in their portfolio.
As often happens, the initial bid was eventually lowered and reduced to a level not acceptable to the seller. Then he had tried to sell his business through a website and had received responses, but even those ultimately did not lead to the bids that came close to his price expectations.
His question was what was our take on this phenomenon and why we, as a party, could possibly achieve a better result?
Market process
This was a prime time to invoke the wisdom of economist Von Mises. This founder of the Austrian School of economic thinkers wrote in his work that prices are a market phenomenon and are generated by the market process.
Setting the price of a business also requires a market process. And a good price for a business requires a good market process. The question that may come to your mind then is: what is a good market process for sell a business.
In our experience, a number of things are important for a good market process:
- Describe the company in a document that best highlights the value of the company. Especially in the industry in which our firm operates (ICT), we find that it is important to properly translate the value proposition of a company into understandable language;
- Try to rig a process that is well planned in time and includes deadlines so that parties work toward an end goal;
- Divide the process into a number of stages, gradually removing the less interesting bidders from the scene;
- Make a (long) list of well-selected potential buyers and simultaneously inform them about the impending sale of the business to initiate a proper market process;
- Make sure you have a good mix of potential buyers, inviting, on the one hand, financial buyers who expect to achieve growth and financial returns with the purchase of the business and, on the other hand, strategic buyers who expect to achieve synergy benefits with the purchase;
- And last, but certainly not least, as a seller you need to look not only at the price, but also at the proposed transaction structure and conditions attached to the bids. Try to pull the discussion of these forward in the process so that the bids provide a complete picture of risks and rewards.
The entrepreneur quoted earlier in this post went through the above sales process and was able to receive multiple bids for his business that compared well.
In the end, he found an excellent party that met his expectations in terms of price, personal chemistry and terms and conditions. A good process proved to be half the battle in this case because good direction saved time and increased value.
