THE DANGERS OF TRYING TO PAY TOO LITTLE FOR A BUSINESSHERE’S WHY

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When it comes to buying a business, the negotiation between

seller and buyer is intricate and many layered. A potential

acquirer frequently tries to buy a company at the lowest

possible price, thinking this is in their best interests. While

obviously not good for the vendor, it is also important that the

buyer understands trying to secure a bargain is not necessarily

to their benefit.

The key to this understanding is to create a competitive environment

by identifying a range of possible acquirers. Building a pool of well-

funded interested parties, each with a strategic reason to buy that

business has several effects.

Firstly, it enhances the perceived value of the business. The presence

of multiple bidders confirms to each that the others agree with their

assessment of the company’s potential and the future opportunity

it represents.

Secondly it ensures the buyer understands that his purchase is not

inevitable and that there are a number of possible outcomes. It

makes clear that both parties must be satisfied with the eventual deal

for it to proceed.

This is the turning point in any company sale. The buyer focuses

instead on why they want the company and what they will gain from

the deal. Competitive pressure has moved the buyer’s thoughts

on from “What is the risk of buying this business?” to the much more

pertinent “What will we lose by not buying this business?” The

perceived risk of acquisition now becomes a very real risk of allowing

a rival to benefit from its profit and growth potential instead.

The table below shows how the range of bids for a company can vary.

Selection of offers made through BCMS in Q1 2015

Co. Description Lowest bid (£m) Highest bid (£m)

Investment company 1.7 1.7

Private Equity company 4.4 6.0

Cabling company 1.9 3.9

Cooling systems company 4.2 11.4

Medical equipment manufacturer 2.0 6.4

Medical diagnostics company 1.2 2.4

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CASE STUDY Our client was a specialist food manufacturer. A highly contested

deal from interested prospects generated 11 meetings within the

UK and overseas. Five parties submitted competitive offers, all

from businesses closely related to this sector. The lowest offer was

£1.5m and then a group clustered around £6m - £7m.

The final selling price was £10.2m.

The cost to the prospects who didn’t increase their offer cannot

be fully quantified, but they missed out on the benefits of

owning a business projecting a 50% EBIT on c. £5m turnover, with

over 1,000 international clients including some large retail chains,

and boasting over 90% repeat business.

That’s a big lost opportunity!

To sell your business for its maximum value requires large numbers of

potential acquirers of the right kind. BCMS seminars explain how to

find the right buyers in sufficient volumes.

To attend a free morning seminar contact us at seminars@bcms.co.uk

To request details of a FREE Business Evaluation Consultation

call on 01635 296193.

Even once a preferred bidder is selected, the need for competitive

pressure continues. Many prospective buyers will try to “low ball”

the offer, reducing the price in response to details that may emerge

during due diligence. Without any other avenues available, the

vendor would be left with little choice but to accept these changes or

withdraw from the deal completely. It is only the existence of other

acquirers waiting their chance to buy, that supports the original price.

While it is not necessary to name the other bidders, explaining that

their interest continues is both honest and effective, and is a message

that must be communicated consistently. Explaining why the other

bidders want to buy can be more effective still.

A carefully thought-out explanation might be “We are talking

to a German, a Chinese, and a US company, that have all been

trying to get a foothold here in the UK for the past 3 or 4 years, it’s

strategically important to them. We think they are likely to place offers

substantially above traditional valuations.

We are also talking to a British competitor looking to increase their

market share in the UK. Somebody else we are talking to is looking to

diversify, they are interested in our client base and products, and they

may put in a similarly high offer.”

The preferred bidder is left in no doubt that the vendor can choose to

sell elsewhere, that the value of their company is widely recognised

and, most importantly, the successful acquirer will achieve strategic

and commercial advantage within their marketplace.