Last time we chatted about having enough ideas of who could buy a business that you’ve got some ideas to choose from. And so, you know, the old saying of “we’ve tried nothing, and we’re all out of ideas” isn’t gonna get us very far.
So, we needed some ideas. Now, what are we gonna do with them?
The first thing is to have some criteria to compare those ideas against. When you’re thinking about finding the buyer for a business, good criteria are:
- “Do they have the money to buy it?”
Another good question to ask is:
- “Have they ever bought a company before?”
- Are you going to have to teach them how to buy a company in general, as well as how to buy your company?
But fourth, and maybe most important, is:
- “Do you think they want to?”
Like many things in life, asking that question straight up might not be the best way to get a clear answer.
When we work with clients and help them identify strong prospects who are qualified in terms of interest, the question we want them to think through first, and then ask with our help, is: “What could we accomplish together that we can’t do alone?”
We are not trying to ask a yes-or-no question and get a yes-or-no answer. We are trying to ask a more nuanced question that forces strategic thinking. That is the way to begin a negotiation over the terms of a business sale, allowing you to influence how the conversation unfolds.
Once you have generated a list of ideas and internally defined criteria for ranking potential prospects, the next step is to develop the story each prospect needs to hear. The goal is to prompt them to see why engaging in a conversation about a purchase, sale, or joint venture makes sense.
The second step is to develop a specific story for every prospect. What should that story include? It should explain how your company, when combined with theirs:
- Adds new customers
- Introduces new products to their existing customers
- Reduces costs
- Adds valuable talent to the team
These are compelling reasons for a larger company or peer company to consider the impact of integrating your business into theirs.
What is not part of that story is the multiple of last year’s EBITDA on your standalone business. That is explicitly not part of the narrative. Buyers do not make decisions based on how price multiples are casually discussed in the market.
Many business owners hear statements like: “I sold my company for twenty times last year’s earnings. A 20x multiple.” They either think, “How do I get that?” or assume that reflects the market. In reality, that number is rarely meaningful in any repeatable way.
There are several reasons for this. A multiple of last year’s EBITDA is a common way to describe price after the transaction closes, but it is not how the decision was actually made. Both the multiple and the EBITDA figure itself are negotiated numbers. The parties negotiate how past earnings are interpreted. Then, they negotiate what multiple of that adjusted number makes sense as shorthand for describing the deal.
However, when the buyer independently decides what to offer, including price and terms, their internal discussion sounds very different. They are asking:
- What is my return on investment for the capital I am deploying upfront?
- What happens when I combine this company with mine?
- What will sales look like?
- What will expenses look like?
- What staffing changes will be required?
- What cross-selling opportunities exist?
- What market or marketing opportunities could create a significant impact?
Their internal discussion is not about what happened last year. It is about what will happen over the next five years that justifies the price. If your question to a buyer is: “Do you want to buy my company or not?” You will not be part of the conversation about what happens after the sale. If you want to influence price, you must be part of the conversation about post-transaction performance.
So, what question should you ask, and what story should you tell? Not “Do you want to buy my company or not?”, nor “What multiple of last year’s earnings will you pay?”. Instead: “What impact would it have on your business if we combined what I’m doing with what you’re doing?” “What could we accomplish together in sales if this were a joint effort?” “What expense savings could we create?” “How could we combine the best members of our teams to build something stronger than either of us alone?”. If you initiate that conversation, even at the level of imagination, you position yourself to influence the buyer’s internal discussions about return on investment.
We often tell clients that when they sell their company, they are selling to two people simultaneously: the first is the senior decision-maker, often the president or CEO, and the second is a junior MBA analyst whose job is to build the deal’s spreadsheet model. That analyst, either independently or under guidance, will construct financial projections in a spreadsheet. You win if that analyst inputs the right assumptions and not the wrong ones. You will never see that model, but you must understand that it exists. You must tell a story compelling enough to capture the president’s imagination and concrete enough that the analyst can build projections using favorable assumptions.
When they hold a private discussion about valuation, return on equity, and deal structure, your narrative should already be embedded in their thinking. You will not know for certain, but you will have a strong indication if they return with the right offer.
So, as the second step in negotiating the sale of a business from a position of strength, after identifying the right potential buyers, develop a thoughtful hypothesis about the story they will find compelling. That story should clearly articulate why they should do the deal and what they stand to accomplish by doing it with you.