Selling a Business for 50% More
– Case Studies

Most people have difficulty believing that you can sell a business for 50% more just by executing the exit well. I’ve written before about how this can be achieved. This post has video excerpts where you’ll see CEOs and Chairs who have actually done it.

It is very unusual to hear case studies like these. Almost every exit is covered by a non-disclosure agreement. These are rare cases where the acquiring company was public, and small enough to make the transaction material to their financial statements.

In our business, we see prices increase 50% about half of the time. We know of many other cases like these, but unfortunately we can’t share the other stories.

Parasun’s CEO – Moving the Price from $10 million to $14.8 million

  • The biggest factor was multiple bidders
  • The M&A advisors had the ‘good cop – bad cop’ thing down
  • The CEO ended up being the person the buyer confided in during the negotiations


Parasun’s Largest Shareholder – Adding $2 million more

  • It was important that Barry not be involved in the negotiations
  • We needed to have ‘someone on the outside’ for ‘the bad guy’ to come back to
  • Barry’s job was in large part theater
  • “If I had been sitting at the table I would have caved”
  • This was Barry’s third exit
  • The difference was that he brought in pros that sell [companies] all the time
  • The importance of stipulating a working capital on closing – a $2 million win
  • “I thought, well, that pays for them” [the M&A Advisors]


The full case study on Parasun is available here.


Pacinian’s Chairman – Moving the Price from $20 million to $30 million

  • Pacinian was pre-revenue – so the entire value was intangible
  • Exit strategy minimum selling price was $10 million
  • Exit strategy asking price was $20 million
  • Closing price was $30 million
  • That took some competition
  • When we were certain we’d get more than one bid, we raised the price.


Read the full Pacinian case study and view the complete set of video interviews here.


Vineyard’s CEO – Moving the Price from $18 million to $28 million

  • They re-did the valuation and discounted everything
  • Initial offer was $18 million
  • We thought it should be more like $30 million
  • Maybe we don’t know how to negotiate this
  • At that point we went out and started to seek some serious help
  • Closing price was $28 million
  • We were like a family for 3 or 4 months
  • The price for companies like this aren’t precisely determined
  • There weren’t competitive bidders
  • Jason describes the revenue multiples and the factors affecting the final valuation


Please check back for more on the Vineyard exit, coming soon.

Selling A Business Can Increase the
Value 50+%

The effect of strategy on exit valuation is one of the most challenging concepts for investors and entrepreneurs to intuitively understand. I didn’t ‘get it’ until I was fifty. It’s not that I am slow to learn, it’s just that, like a lot of things in life, it takes a few dozen experiences before the lessons really sink in. When those experiences are about selling a business and each data point can take a year, it can take decades to accumulate a complete understanding.

An extraordinarily valuable lesson for both entrepreneurs and investors is that when you sell a business, a well designed and executed exit strategy can often increase the business valuation by 50%, and sometimes by 100%.

Yes, that is correct. The business valuation can increase by 50 to 100% just because you sell the business well.

Another way to look at this is that the exit transaction, which occurs right at the end of the company lifecycle, can make you half again as much  money as all of the years of hard work that went into the business from the founding until you cash out. For example, let’s suppose you have worked very hard for three or four years to build a company that is fairly valued at $10 million based on standard valuation methods.

By designing and executing the exit well, you can often sell that same business for $15 million, or possibly even $20 million. This is not a fluke or random occurrence; it happens all of the time. (The important factor to keep in mind here is ‘well designed and executed’.)

Yes, I know it doesn’t seem intuitively obvious, which is why I’m writing this article.

My First Business Sale – Nexus Engineering

The first time I experienced the 50% business valuation increase was when we sold the company I co-founded in grad school – Nexus Engineering. We managed to sell it for about 50% more than everyone expected. I thought it was a fluke – a lucky accident. It wasn’t until I had seen the same 50+% business valuation increase about a dozen more times, and talked with quite a few smart guys who had each sold businesses a dozen times, that I appreciated this 50+% business valuation increase can happen much more often than most people realize.

Value Is Not Created Linearly

One of the ways to intuitively appreciate how extra value is created by the exit transaction is to extend a more familiar concept about how shareholder value increases earlier in the company lifecycle. Significant valuation increases usually occur in discreet steps rather than through smooth linear growth. These steep value increases occur when individual strategies are successfully executed. Familiar examples are strategic partnerships, marketing alliances, acquisitions, new locations and new products or services. These strategic initiatives almost always create more fundamental business valuation than all the hard work on execution that most of the company employees spend most of their days working on.

A well designed and executed exit transaction is the last, and usually largest, strategically driven increase in business valuation.

This non-linear increase in business valuation is described here.

Building Company Value

Markets for Selling Companies are Very Inefficient

The market for selling a business is very ‘inefficient’. This is one of the reasons a well designed and executed exit can easily increase the business valuation by 50% or more.

The market for selling companies is inefficient because:

  • there are very few buyers and sellers,
  • the market is illiquid, and
  • information is not easy to access

This post describes the market inefficiencies when selling a business and uses the residential real estate and NASDAQ markets as counter examples. It explains how this market inefficiency can contribute to a 50+% business valuation increase when you sell the business.

Strategic Value Can Be Very Different to Different Acquirers

One of the most important reasons selling a business well can increase the business valuation is the high degree of variability in the ‘strategic value.’ Very loosely, that is the increase in the value of a target company over its ‘financial value’. This page includes more on increasing strategic value during a business sale, including ways to discover and communicate it to prospective buyers.

Selling a Business Well Requires Multiple Bidders

In my opinion, almost every time you sell a business, the exit strategy should include multiple bidders. An active bidding process ensures predictability, negotiating strength, price maximization and good governance. Most importantly, it dramatically increases the probability of a transaction actually closing.

This post describes each of these elements in a successful company sale and explains how they contribute to the extra 50+% business valuation.

Excellent M&A Advisors Can Significantly Increase Business Valuation

After watching about a hundred exits, I am convinced that companies should be sold, not bought.

There is more  mystery around selling  businesses than there should be. It’s true that the dollar numbers are very large – they are probably the largest of all sales. It is also true that these are the most complex of ‘complex sales.’ But other than the size and complexity, selling a company is a pretty standard marketing and sales process.

It still all comes down to people. It’s people who make the decisions to buy and sell businesses. No matter how big the business for sale, these individuals, like all other investors, have psychological characteristics that make them susceptible to a well designed and executed sales strategy.

This means the skill of the sales person (M&A advisor) working with the  CEO to sell the business can have a large effect on realizing that final 50+% increase in business valuation.

No matter what it costs, engaging the very best M&A advisor  will deliver a high return on investment – this page explains why.

Recent Case Study – Parasun

In my BC Tech Fund portfolio, I invested in 9 companies. About three years after the first investment, three of the nine had a liquidity event – one went public and two were acquired. This was not a happy accident; it was a necessary component of the portfolio strategy.  In that fund, I both selected companies I thought could execute early exits and worked actively with the boards and CEOs to sell the businesses.

The Parasun case study is posted here.

Public Company Examples

There are very few private company case studies that illustrate how selling a business well can increase the business valuation by 50% or more. Even when it happens, it’s not easy to quantify the difference in the business valuation before and after the exit transaction. That’s one of the reasons this concept is so unfamiliar to most private company investors and entrepreneurs.

Fortunately, the same dynamic occurs regularly in the public company markets. This page describes a few  public company examples which clearly show the business valuation increase when selling a company.

Summary

One of the most valuable lessons for both entrepreneurs and investors is that when you sell a business a well designed and executed exit strategy can easily increase the business valuation by 50%, and sometimes by 100%.

Selling a Business and Inefficient Markets

The market for selling a business is very ‘inefficient’. This is one of the reasons a well designed and executed exit can easily increase the business valuation by 50% or more.

The best way to illustrate this is with a counter example – the residential real estate market. Most of us are familiar with selling a house. If you contacted the top ten realtors in your area and asked them what you could sell your house for, you’d probably get answers within 5% of each other. Similarly, if you could find a number of buyers who were currently in the market for a house just like yours, and they had recently spent time looking at comparable properties, they could also give you a very accurate estimate of the selling price for your home. This is because the market is ‘efficient’. This means the market has lots of buyers and sellers, is relatively liquid and information is readily available.

A ‘liquid market’, or one with good liquidity, is one where transactions happen frequently and with good predictability. The NASDAQ stock market is a good example. If you own shares in a NASDAQ listed stock you can post them for sale at the market price and you will usually have a buyer within a few minutes.

In an efficient market it’s very difficult for a buyer to find properties that are significantly undervalued. This is the fundamental premise behind the ‘efficient market theory’. A practical outcome of the efficient real estate market is that the price you can get for your house isn’t going to change much regardless of how you market the property or which real estate broker you choose (my apologies to real estate brokers everywhere).

In contrast, the market for selling a business is inefficient because:

  • there are very few buyers and sellers,
  • the market is illiquid, and
  • information is not easy to access.

Scarcity of buyers and sellers

‘Market depth’ is the term that describes the number of buyers and sellers. When you sell a business, there are probably only a few hundred suspects, and a couple of dozen potential buyers in the world. From a buyer’s perspective it’s even worse. For example, if your corporate strategy is to purchase an established photo sharing site like Flickr, video sharing site like YouTube or URL sharing site like Del.icio.us, there are probably only a few companies like those available for purchase at any one time. This relative scarcity of sellers and buyers means a buyer may have to pay substantially more than a ‘typical value’ to successfully acquire one of the few businesses for sale.

For business brokers, finding those dozen or so prospective buyers that are ‘in the market’ for a specific business  is an enormous amount of work. This is exacerbated by the reality that most of the best buyers won’t even know they want to buy a particular business until someone gets their attention and shows them why they should be interested. Another way to say this is that companies are ‘sold, not bought’.

Illiquidity

The market for buying and selling businesses is also very illiquid. In contrast to the NASDAQ market where transactions only take minutes to complete, or the residential real estate market where sales usually only take a few weeks, selling a business (the right way) often takes a year or more. There are many reasons for this including the:

  • lack of available information
  • time required to contact suspects
  • time it takes to explore a fit
  • complexity of the non-monetary term negotiation
  • months required for due diligence and, of course,
  • delays related to the legal process on both sides.

Lack of information

The third factor contributing to the inefficiency of this market is the difficulty in accessing information. Every market needs information on:

  • who the potential buyers are
  • what properties are for sale
  • information on those properties and
  • data on comparable transactions.

In the real estate market, for example, all of that information is available online except for the names of the potential buyers.

In the market for buying and selling businesses, none of this information is readily available. For example, if you wanted to buy a company like Flickr, YouTube or Del.icio.us, there is no website where you can do a search for companies like those for sale. Similarly, if you wanted to sell a business like those, there is no website you can go to find prospects who are in the market. Some entrepreneurs have tried to sell their businesses on eBay or Craig’s List, but we just aren’t there yet. We might be one of these days, but I suspect the market for buying and selling businesses will remain too small for online matching to make sense for the foreseeable future.

This scarcity of information isn’t just a problem during the matching phase of a business sale transaction. Even after a buyer and seller have found a good fit, lack of information is still a significant challenge. Even the simplest element of a transaction – the price – is difficult to find information on. Even if you could build up a list of prices on similar transactions, the information you really need is not just the selling price, but also details on the main value drivers in the transaction, like revenues, profits, growth rates, etc. Using the residential real estate market as a comparable again, it’s easy to find a website listing the details of comparable property sales in your neighborhood. You can see the selling prices along with the size of the lot, age, number of square feet in the home, number of bedrooms or bathrooms and a dozen other key metrics.

I recently spent a half day looking for a list of Web 2.0 company acquisition prices that compared selling price to number of pageviews, unique visitors, ad revenue, etc. I found one, which looks like the only one, but it only includes about a dozen transactions, and there is only complete information for a few of the companies.

This lack of market efficiency is, like a lot of things in life, both good and bad. It means that a tremendous amount of work is required to sell a company  well. But it also means that a well designed and executed exit transaction can increase the selling price of your business by 50% or more.

Public Company Acquisitions Can Increase Business Value

The public markets provide much better data to illustrate the  50+% increase in business valuation that can be realized when you sell a business.

This increase in value is much more familiar to public market investors, in part because the increase in price is so easy to see. In the public market vernacular this is usually referred to as the control premium. This is another way to look at strategic value. In my opinion, the  illiquidity in the market (when you are buying the whole company) and investor psychology are just as big a factor as they are in the private markets.

Hostopia

This is a classic example. Hostopia is a Toronto based web hosting company. They went public on the TSX in November of 2006 raising $25 million at $6.00 per share. In June of 2008, a US company Deluxe Corporation agreed to purchase the company for $10.55 per share.

As you can see from the chart below this is 100% more than the stock had been trading at.

Prior to the offer, the stock had been trading for a year at prices between $5.00 and $6.00. This means that hundreds, or possibly thousands, of investors made decisions that Hostopia’s stock was fairly valued at $5 to $6.00. Nevertheless Deluxe paid $10.55 per share to buy the entire company. No wonder public market investors get excited about acquisitions.

Hostopia Historic Chart Jul 18 2008

Xantrex

This is another very similar example from this week. Xantrex is a Vancouver company that acquired Statpower, one of the companies that was part of the Nexus Group – my first startup. Xantrex had been trading for years at prices of around $10.00 +/- $2.00. This year, the average price was around $9.00. They were acquired by Schneider Electric for $15.00 per share – over a 50% increase from the price it had been trading at.

Xantrex Historic Chart Jul 29 2008

Yahoo

Another familiar recent example is Microsoft’s offer to buy Yahoo.

It had been rumored for some time, but on January 31, 2208 Microsoft offered to purchase Yahoo at $31.00 per share a 62% premium over what the stock had been trading at.

As hopes for the acquisition faded, the stock dropped back to just about where it was before the announcement.

Yahoo Historic Chart July 22 2008

I am sure there are many other good examples of this 50+% increase in business valuation that is possible when a public company is sold. If you come across other good examples, please let me know so I can expand this section.

Company Sales Need Multiple Bidders to Maximize Valuation

Companies are sold not bought

Many entrepreneurs think that when their company is ready to be acquired, a buyer will knock on their door and make an offer. This does happen, but less often than someone knocking on the door of your house asking to buy it. Even if an unsolicited offer does come in, boards should almost never approve a company sale when there is only one bidder because the price will almost certainly be too low. Even if the buyer actually did pay a fair price, there would be no way to avoid the perception that the price was too low and the board did not do its job properly.

In almost every private company, or small public company, if an unsolicited offer is made it’s usually a lost opportunity.  This is because there is almost never enough time to get other bids before the first party loses interest.

Successful company sales almost always involve a competitive bidding process.

There are several reasons why a bidding process is essential to sell a company well:

  • Safety
  • Predictability
  • Negotiating strength
  • Maximizing Business Valuation
  • Effective governance

Safety

As I described in the story of my first company sale, buyers often abruptly stop calling for no apparent reason. Most often it’s because something else came up that was more interesting, or something changed inside their organization. When this happens, it’s usually impossible for the team selling the company to re-engage them.

Company sales transactions also have a disconcerting tendency to blow up at the 11th hour and 59th minute. In fact, in all of the exits I have been part of, I cannot recall one where there wasn’t some last minute potential deal breaker or sticking point. This is often because both sides often leave the really contentious issues to the very last minute. Another way to look at it is if there weren’t a few sticking points the company sale would already be complete. By definition these sticking points are contentious and difficult to navigate, which is why they often blow the deal up.

For the safety of the selling shareholders, it’s essential to have multiple bidders going into the final term sheet negotiations.

Predictability

Like most things in life, once you have actually completed ten or twelve similar company sales it’s reasonably easy to predict how long the process will take. Most shareholders, once they have made the decision they want to sell the company, would like to complete as quickly as possible and, more importantly, with as much predictability as possible.

Predictability is also very important for the business. The employees often know when a company is for sale. This inevitably creates uncertainty and anxiety. The senior team knows their life is going to change and they’d like to know how so they can plan their personal lives. The industry also often knows when a company is in play and this can affect sales, trade credit and strategic relationships.

The worst thing that can happen is a company engaging with just one interested party. This is what usually happens –  talks progress for six to nine months, then for one of the standard reasons, discussions terminate. At that point, the company has to start the entire process again – often losing a full year in the process.

Even worse, if a year goes by and the company is not sold, everyone from the shareholders, to the employees, to the customers will be sure something is terribly wrong. This will probably start to erode the fundamental value of the company. The team responsible for selling the company will also suffer from selling fatigue.

Once a board makes the decision to sell the company, the process must be effectively managed to ensure full redundancy all the way to the signing of the binding term sheet. The only way to ensure this is with multiple bidders.

Negotiating Strength

I’ve had the pleasure to work with, learn from and be sold by, some truly outstanding sales professionals. I think most of us sell most of the time… well, at least when we’re awake anyway. After a few decades of working with some of the best, I believe you can develop a pretty well-tuned veracity meter. This is not to suggest sales people are not truthful, but it is probably fair to say that the successful ones usually highlight the positives in their product.

When companies are being sold and bought the people around the table are all usually pretty sophisticated.  But there is still a sales process going on, and very often millions of dollars of price are moving back and forth within minutes. Some of this is just plain salesmanship – everyone trying to get the best possible deal for their team.

If a company only has one bidder, I believe it’s impossible to get the best possible deal. Many times, I’ve been across the table in a company  sale where the other side was trying to convince us they had other bidders or targets. In many cases it was true, which had a big effect on our posture and positions. But in other cases, their assertions just didn’t ring true – the other side tried to make us believe, but ultimately didn’t pull it off. I have come to believe that in 99.9% of situations you cannot successfully convince a sophisticated buyer you have more than one bidder, if in fact you really don’t. (The 0.1% exception is the rare, true sociopath. These guys are so scary because they can lie effectively even to a very sophisticated audience. The only protection against them is the background check.)

Every company sales team needs negotiating strength. Maintaining multiple bidders for as long as possible is the best way to build and retain that strength.

Maximizing Business Valuation

The market to sell a company is both illiquid and inefficient.  And no matter how perfect we’d like to think we are, all of us are susceptible to a professional sales effort. Each of us instinctively wants to get the best ‘deal’ we can in each transaction we are part of. We also want to close – it just feels bad to put a lot of work into a company sale or acquisition and not have it complete.

Having multiple bidders is the surest and fastest way to maximize business valuation. I’ve seen this work dozens of times from both sides of the table. Supply is always very limited in the market for selling companies. Often there is only ‘one’ like this for sale. There are almost always several potential buyers. In any market where there is only one for sale and there are multiple bidders the price will go up.

It’s impossible to maximize business valuation  where there is only bidder, no matter how good the sales team is.

Good Governance

Company boards are elected by the shareholders to act in their best interests. Other than hiring and firing the CEO, a board’s most important work is during a change in ownership. This is a unique time for a board because it is their last job for the shareholders who elected them.

As every veteran director knows, it’s often easier to do the right thing than it is to be seen to be doing the right thing. Company sales are always complex transactions. No two situations are exactly the same. Managing the balance between the desires of the company management and the best interests of the shareholders is often an enormous challenge.

By far the easiest way for a board to know they have done the best possible job, and to show that they have done the best possible job, is to have multiple bidders. If there are three bidders offering to buy a company it’s easy to compare one against the other, and usually easy to select the best offer. If there is only one bidder, there is just no way to know the board has gotten the best deal for the shareholders – even if they really did.

Every successful company sale has to have multiple bidders for safety, predictability, maximization of business valuation and good governance.

Illuminating Strategic Value When You Sell a Business

Another reason a well designed and executed exit strategy can increase the business valuation by 50% or more when you sell a business is the ‘strategic value’. The only reason any company buys another company is because they believe:

  • they can increase the value of the company being acquired, and/or
  • the acquired company will increase the value of their company.

Different prospective acquirers will have different elements in their businesses which will allow them to increase this strategic value. The most successful company sales are where the combination of the two businesses increases the total business valuation faster than either company could achieve alone. In other words, when 1 + 1 = 3.

How strategic value increases business valuation

One of the most obvious examples of strategic value is reducing competition. This was a very popular driver for company acquisitions a hundred years ago. Many of the most successful entrepreneurs of the 19th century created enormous wealth by concentrating ownership in business verticals, thereby reducing competition and allowing price increases. In some cases, the railroads and steel industries for examples, the concentration of ownership was so egregious that these business people were often referred to as ‘robber barons’.

More recently, many of Microsoft’s company acquisitions have been viewed as Bill Gates reducing competition. The American government, and some in Europe, dragged Bill Gates  into court in an attempt to reduce his monopolistic influence in the global economy.

Today, the US government tries to prevent mergers and acquisitions that will reduce competition. Often, when you sell a business today the company being acquired, and the acquirers, will have to complete a Hart-Scott filing to show that what they are planning will not result in reduced competition.

But let’s be realistic, acquisitions to reduce competition happen all the time. Even today, one effective way to sell a business is to sell it to a competitor. This type of company sale requires some significant skill and protective tactics, but it’s still a great element in an exit strategy.

A better example of how strategic value can increase business valuation is when companies have complementary products or services. A classic situation is where a larger company has an existing customer base who could be users of a target company’s products. Some familiar examples are eBay’s acquisition of PayPal, Yahoo’s acquisition of Flickr, or just about any of Google’s acquisitions. Other good examples are the acquisitions here.

Another excellent way to unlock strategic value when you sell a business is to find a company that would like to develop a similar product or service, but will pay to reduce their ‘time to market’. Big companies grow more by company acquisition than by internal R&D. Part of the reason is because big companies are not very good at innovation. The other part is that being fast is often better than being good. Big companies can usually get to market fastest by buying one of the established leaders in a market vertical. For a big company, a one or two year lead can often be worth tens, or hundreds, of millions of dollars of increased business valuation.

Why should the buyer pay the seller more? Good question, but in practice they will

An important part of the marketing and sales job when you want to sell a business is to discover, and communicate, the full strategic value to the buyer. During this discussion, the prospective buyer will inevitably say something like: “Sure, I see the additional value your business will bring if we acquire you, but we are not going to pay you for that.” In other words, the buyer doesn’t see why they should pay you more for the extra strategic value they will generate in the business, post acquisition.

It’s a fair point, and the best response is to concede gracefully. But the reality is that once the prospect sees this ‘extra’ strategic value, and they realize the business is worth more to them than to another bidder, they will be willing to increase their offer to acquire the company.

Another way to look at it is that once the buyer realizes that 1 + 1 = 3, they will be willing to pay more than ‘1’ for the business. They might even split the difference and pay ‘1.5’. (Obviously the math here is way too simple, but I hope it illustrates the point.)

It usually takes the prospective buyer months to fully appreciate the strategic value

Helping discover and communicate this ‘extra’ strategic value to the buyer is one of the most valuable skills required to sell a business well.  In most cases, it is the selling team that first discovers and fully appreciates the strategic value and it’s fair impact on the business valuation. In my experience, it often takes the selling team weeks, or even months, to get the prospective buyer to appreciate this ‘extra’ strategic value.

There are several reasons the sellers usually see the value first and that it takes so long to communicate. The buyers are often very large companies, with many tightly focused divisions. The people in the ‘M&A department’, for example, are usually not technical or industry people. It’s not at all unusual for the senior team in the company being sold to have a better understanding of the technology, industry dynamics and future trends than the ‘professional business buyers’ in the M&A department. Fully developing an appreciation of the strategic value and fair business valuation in the collective mind of the buyer generally requires consensus building among a number of people in several different departments. In a Fortune 500 company, building that consensus might mean getting the M&A team, CFO, several VPs and division heads, the CEO and some board members onside. Even with a concerted effort from an excellent sales team, and a high level champion inside the prospective acquirer, this process can easily take three to six months.

Discovering and communicating the strategic value of an acquisition is one of the most significant reasons that well designed and executed exit plans often take six to eighteen months to sell a business well.

It’s also a big part of the reason that a well designed and executed exit transaction can often increase the price received when you sell a business by 50% or more.