Get the right exit price

It's more important than ever for those selling their business to think about the key points the buyer will find attractive.

For most buyers, the starting point for any negotiation will be price. As we all know, you must always include any exceptional costs such as one-off bonuses, unusual bad debts, recruitment fees and exceptional legal fees.

To get the price you want, you should try to find ways that your potential buyer can cross-sell products into your existing user base. Moreover, examine the savings to be made through the two businesses joining together. Quite often the vendor leaves the latter calculations to the acquirer, but it is well worth understanding the likely costs and benefits of restructuring. This way, you can be proactive and show how the new entity can run with greater efficiency (although, admittedly, this may be painful for your employees, who may suffer from any integration plans).

In nearly all cases, the best price is obtained for a company when there is sector consolidation. Time and again I have seen companies in the same sector merging because they believe their goal should be to have a larger market share than a competitor.

While this may prove lucrative for the vendor, it may not be right for the two businesses. There will be a degree of cross-over between the companies, but very often they are, by and large, specialising in different areas. The effort made to try and unify these various strands can ultimately prove counterproductive as, over time, the merger simply dilutes the quality within both businesses.

To prevent this, it’s vital to understand what each party is truly good at. If the buyer doesn’t ‘get it’, there’s a real risk of undermining the acquired company’s niche market. A classic example is to take control of a business and start cutting prices in a totally misguided effort to win market share.

Recurring revenue is a pet subject of mine, and it’s no coincidence that companies that have it are still commanding premium prices even in the recession. Many software businesses are highly desirable because they often charge on a yearly rental model, rather than upfront licence fees.

As I’ve said before, in the short term this means profits are smaller, but once critical mass is achieved every new rental agreement falls straight to the bottom line. Even if you are not in the technology sector, think about how you can increase your recurring revenues by the provision of services such as maintenance contracts.

For an acquirer, recurring revenue provides a level of security by protecting against downside risk. If your buyer is using bank debt, this is something the bank will find attractive as security for the acquisition loan.

Most buyers are looking for a sustainable business advantage when they acquire another company, so make sure you emphasise your technological superiority, intellectual property rights and the importance of spending on R&D.

Remember also that domain expertise in your sector is a key advantage, so build up your portfolio of knowledge based on your key customers. The secret to extracting real value in your company is rarely to be found in the numbers, but in establishing the skill, expertise and potential of the business as a whole.

See also: Is your business worth what you think it is? – how to calculate sale price

Related Topics

Exit strategy