Most business owners would prefer to sell without advertising. Unfortunately, it is hard to market a secret.

Not withstanding this, most businesses are advertised widely for sale in the hope that the right buyer will come walking through the door. This is unfortunate, because there are significant issues with having the world know that the business is for sale:

• Customers may become unsettled
• Employees may leave
• Competitors will have a field day destabilising the business in the marketplace.

There is a more scientific process than advertising widely. It proceeds on the basis that there is a “Most Probable Buyer” for most businesses and that if they have been identified, there is no need to advertise to other possible buyers.  The aim is to find that buyer using a methodical system and to do it long before the business is put up for sale. That system is called the “Investor Discovery Process.”

Investor Discovery Process

When done properly, the Investor Discovery Process can reveal the Most Probable Buyer within a few hours. It does this by using a systematic examination of all the other companies that could exploit the business capability better than the present owner, that can ramp up the revenues significantly using their own resources and that can release the constraints on the business so that it can grow rapidly.

The system seeks out corporations that can leverage the assets of the business to resolve a threat to their own business, or to sell your products through its own much larger distribution channels.  It seeks out larger companies that:

• Are capable of buying the business
• Are willing to buy the business
•  Have bought similar sized businesses in the past.

Once the Most Probable Buyers are identified, they can be approached directly and there is no need to advertise to the world that the business is for sale.

There are several methods of approaching the Most Probable Buyers that do not depend on conventional advertising.

The One-to-One Approach

Where confidentiality is important, a one-to-one approach to the Most Probable Buyer is made. This is a laser beam approach rather than the shotgun approach that is inherent in most advertising.  With sufficient time, a relationship can be built with this Most Probable Buyer during the months of sale preparation.  By the time the business is ready for sale, this Most Probable Buyer is aware of the strengths of your business and how the business might complement its own.

The Planned Bid Approach

The second type of sale is where up to five Most Probable Buyers are identified through the Investor Discovery Process and are all approached at the same time. The idea is for a planned bid process to be undertaken by all of them to introduce price tension.

The difficulty here is usually one or two of them are not sufficiently interested at the time you have chosen to go through a due diligence and bid process.  This type of sale usually yields two possible buyers when it is done well.

The Open Sale Approach

The third type of sale is an open sale where up to 20 possible buyers are contacted or the business is advertised to a targeted mailing list.

This approach has a formal expression of interest or bid process put in place.  With numerous bids, price tension is maximised and competition tends to maximise price.  The drawback is that confidentiality is compromised and with so many bidders, deadlines could be extended several times so the deal begins to get stale.

How Many Potential Buyers are Needed?

Professional investors and big companies often ask for a period of exclusive dealing in negotiating a sale. It is tempting to be seduced into accepting this request, but it is difficult to extract the maximum value with only one bidder.

So how many potential buyers do you need? At first blush, one might say “the more the better.” This, however, is usually a mistake because the best buyers might decide that they don’t want to participate in an auction with a reduced chance of success.  In this case,   they simply pull out.

The real answer is you need two committed potential purchasers. To get to two, you might need to start with four or five, as some usually drop out due to competing calls for their capital or an inability to agree on price.  With two buyers, there is some competitive tension and there is a better chance of realising the best price.

What are the Main Types of Buyers?

There are usually just two types of buyers:

• A ‘financial’ buyer, or
• A ‘strategic’ buyer.

The sale preparation, the sale process and the sale price all very different depending on which of these buyers of these you are aiming at.

When looking to sell to a financial buyer, you need to aim at potential purchasers that have the capacity to grow the business and to manage it at the operational level.  Examples of such buyers are retired executives from your industry, private equity firms or other acquisitive businesses interested in ‘rolling up’ a competitor. Financial buyers rarely pay more than the market price and are very interested in the profitability and future prospects of the business.

When looking to sell to a strategic buyer, however, you need to aim at potential purchasers that need what you have.  This might be an icon brand with a long provenance, a dominance in a particular niche, special intellectual property or long term contracts with blue chip clients.  To sell to a strategic buyer, it is essential that your business can be characterised as unique, difficult to copy, hard to acquire, or prohibitively expensive to reproduce. It is the integration of such a business into the purchaser’s existing operation that provides a strategic leap forward for the purchaser.  This justifies the purchaser paying a much higher purchase price than the simple market price.

Importantly, a strategic buyer is usually less concerned with profitability than a financial buyer is. Thus, if a business is not achieving reasonable EBIT, it is possible that some or all of the business assets might nevertheless be attractive to a strategic buyer.

Summary

The real test of whether your business has been successful is when you sell it. The best time to sell it is at the top of a business cycle, when an irresistible offer comes in the door, or when you cannot expand (or even continue) any further without new capital.

Most business owners leave millions on the table when the sell, simply because they do not understand how business exits work. Many business owners fail to prepare in advance for a planned exit or an unexpected offer.  Lack of planning leads to fruitless months of work following ad-hoc approaches that mostly end in failure.

It is possible to sell your business without advertising and you really only need two prospective buyers to generate competitive tension. These buyers, however, should be identified well in advance through an Investor Discovery Process.

Wherever possible, try to sell your business to a strategic buyer rather than a financial buyer as the price is likely to be higher.