Improve, Prevent, Fix - 3 Ways To Tap Into A Strategic Buyer's Positive Ulterior Motive
Walter Adamson
? Helping business owners transform every role with AI-Thinking to boost productivity ? Empowering human potential one person at a time by enhancing productivity and role deliverables ? Beyond knowledge to Mastery
You're considering selling your business, but the valuation range from your accountant doesn't capture what you believe the company is worth. Your experience in the industry tells you that the right buyer would pay a premium.?
If you feel confident that your business can attract a price above a pure financial valuation, you owe it to yourself to seek a strategic buyer. (Hopefully, you've had this realisation at least 18 months before you hope to do a sale transaction.)
How do you start to identify these buyers and build a compelling story around capturing the value?
Tapping into a buyer's positive ulterior motive
Just as beauty lies in the eye of the beholder, value lies in a buyer's mind. Therefore a buyer must have an ulterior motive - in a positive sense - as otherwise, they would not pay a premium.
One of the pillars of achieving a peak exit value is to stimulate and elevate a buyer's thinking about how to achieve their ulterior motives. You can accomplish this by crafting a baseline story around your premium assets - despite not being privy to a buyer's specific goals.
Here are three ways to start thinking about the value of your business to a strategic buyer.
What is the strategic value of my business?
Let's start by defining the strategic value of your business. I found this definition online:?
"Strategic value is the value that you can extract from your business if you sell to a strategic buyer."
However, knowing this doesn't help you as:
Strategic value is where a buyer can generate a higher net present value from buying your business than from alternative investments with the same business goals - typically compared to organic growth. In other words, the lowest opportunity cost.
The most obvious example of strategic value is when a buyer acquires a business that provides products, services, resources or market access that complements their own. There is an opportunity cost in creating these assets from scratch. The offer price is the manifestation of the buyer's ulterior motive which includes optimising opportunity costs.
Which elements of strategic value most decrease a buyer's opportunity costs?
Many factors can determine the strategic value of a business. However, three main factors that increase the strategic value are its growth potential, its financial stability, and its competitive edge:
Spelling out the strategic value of the above factors is relatively simple compared to the years of hard work necessary to bring them to fruition.
Preparing for an exit transaction - where a compelling story for buyers is a unique outcome - requires fine-tuning the above factors.
Improving, preventing and fixing lead to a strategic valuation
During a 12 to 18-month exit planning project, the aim is to optimise the business's growth, predictability and resilience, not to make radical changes. The focus is on improving the growth potential, preventing surprises, and fixing the value story to accentuate a buyer's opportunity costs of pursuing an alternative path.
A business with a strong growth story is always attractive at face value - especially on the back of market or technology transitions.?
A business with a proactive growth story and financial predictability is attractive to many buyers. And one with a proactive growth story, financial predictability and a compelling story that resonates with strategic buyers is worth a strategic valuation.
Takeway
Strategic buyers are looking for businesses with which they feel confident that once an acquisition deal closes they will extract more value than they put into it. This is their positive ulterior motive.? The difference between a buyer's (internal) strategic valuation and their offer price quantifies their ulterior motive.
Strategic buyers also seek assurance that the opportunity cost of an acquisition is lower than other options e.g. building in-house. By nailing your growth prospects, operational and financial stability, and competitive edge, you will provide that assurance.
Then, by crafting a compelling story for buyers, you will attract competition and achieve your ultimate exit.
This all takes a plan, and takes time.
The ulterior motive of a buyer who knocks on the door unexpectedly includes the thought that you are underprepared to appreciate the strategic value of your business in their hands. They will seek to anchor an initial valuation in your mind. With 12 months preparation this will not be the case, and you will be in a strong negotiating position.
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This Week's Reading
Two articles from my reading list to help you grow and exit successfully.
领英推荐
Article 1: The Hidden Traps in Decision Making
Making business decisions is our most critical job—and our riskiest. Bad choices could wreck your company. And yet most of us make some terrible decisions every day. Where do these bad decisions come from?
They come from distortions and biases—mental flaws—that sabotage our reasoning. These are hardwired into the way we think.
Though we can't get rid of them, we can learn how to monitor our decision-making so that we don't end up in judgment traps. The article suggests hidden traps to look out for and how to avoid them, including:
Source: (hbr.org)
Article 2: What You Need To Know About Mergers & Acquisitions
Successful mergers and acquisitions are complicated transactions that require careful planning, good negotiation skills, and effective management of both buyer and seller expectations.
This article highlights 12 key considerations to keep in mind about M&A transactions to keep in mind when selling your company, including why:
Source:?(forbes.com)
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This Week's 3 Business Books
Free for you as a subscriber to my newsletter: Three of the world's most essential and popular business books in acclaimed 12-minute videos. Listen, or watch and listen, so you never miss another big idea.
Book 1:?Getting To Yes by Roger Fisher (watch on Monday-Tuesday)
Like it or not, you are a negotiator. You might be finalising a deal with a new client, working through a legal matter, or trying to get your kids to clean up after dinner.
No matter what you are doing, you can learn a better way to negotiate from the book Getting To Yes. It's called principled negotiation, and it was developed at the Harvard Negotiation Project.
Book 2:?Presuasion by Robert Cialdini (watch on Wednesday-Thursday)
No that's not a misspelling! For nearly three years, author Robert Cialdini researched what practices encouraged people to say "yes". What he found was surprising.
The best persuaders become the best through pre-suasion, arranging for recipients to be receptive to a message before encountering it. I highly recommend that you take the 12 minutes to hear this summary as Cialdini is a legend in his field.
Book 3:?Talent Is Overrated by Geoff Colvin (watch on Friday-Sunday)
What do the best performers in their field have in common? Natural ability is the most obvious answer. But it's not right.
The true answer is that each of them has in common their fanatic devotion to something Geoff Colvin would call "deliberate practice."
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? Previous Newsletter: How Having a Preconditioned Mind Gets You Noted On A Strategic Acquirer's Shopping List
? Next Newsletter:?The CEO's Role in Striking a Credible Adjusted EBITDA Prior To M&A
Keep winning, Walter
P.S.?If you know you’re ready… it might be time to explore my?Proactive Exit Mastery?model, to see how you might capture the ultimate exit value for your business.?If you'd like to know a bit more, just message me or comment below with "Ultimate Exit Value".
Director at Cambian Valuebuilders Pty Ltd
2 年Walter, after 25 years selling and buying businesses for clients, and more recently preparing them for sale, there is no standard way of raising the value because every business is different and has different weaknesses to fix and different opportunities to exploit. What is standard and applies to every sale is that it is all about creating value for the buyers. Preparing a business for sale is like manufacturing a product for sale. Quality counts and that comes down to such things as the reliability of the earnings, the quality of management and systems, the business's competitive position in the market and the size of the business.