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Negotiate or Auction?

“It is a match made in heaven. I’ve known for years they’d want to buy my company eventually. Should I negotiate just with them or take my company to market and bring in other bidders, you know, get an auction going?” Though having just celebrated his 73rd birthday, Tom (not his real name) was still going strong. The company he founded in 1982 was generating strong cash flow, and there was nothing on the horizon to indicate the company would not continue to grow.

Tom had first called me three years earlier. At that time, a potential buyer had flown into Nashville and made a strong pitch to buy Tom’s business. Tom asked me to help him determine what his selling price should be. I researched comparable sales relative to his industry and the growth of his company, from which I gave Tom a range of value he could expect. After a few days, Tom decided not to sell. I didn’t try to convince him otherwise, though I wasn’t sure why he was waiting. Tom had already made enough money to retire, and the company valuation would generate capital sufficient to provide a wonderful nest egg for his four children and seven grandchildren. But for whatever reason, at that time, Tom wasn’t ready to sell, and I didn’t push him.

Tom called me last summer saying he was finally ready to sell. It was during that call he posed the question whether he should negotiate with that one potential buyer or take the company to market. By even asking that question, I knew Tom was a smart business owner. You see, most people assume when selling a business, the owner should cast a wide net, get an auction started, negotiate with as many buyers as possible, and watch the valuation soar.

But there are times when a business owner knows in his bones who the right buyer is. When I sold my Christian radio business, I knew the right buyer would be the publicly traded company that specialized in Christian-formatted radio stations. When they knocked on my door, I had a choice just like Tom had — negotiate directly with that one potential buyer or take my company to market. I chose to negotiate directly with that one company because I just felt they were the right buyer. By “right buyer” I mean my business was perfectly strategic with their business, and hence, highly probable to generate a maximum valuation.

Having said that, there is an art to achieving the maximum value in a direct negotiation. The business owner should decide in advance what he wants from the sale of their business, tell that number to that buyer, and be prepared to calmly walk away from the negotiation if the buyer does not agree to those terms.

There are two things you have to remember when doing this: First, you can’t put a ridiculously insane valuation on your company. You can shoot high but don’t be unreasonable. I generally advise owners to get a solid market value, then add about 20% to that number. This 20% is the premium the right buyer will often pay. Think of it as the “strategic premium.” Second, be prepared to walk away if the buyer doesn’t accept your number or get close to it. In other words, you’ll know sooner than later if the buyer really is the right buyer. If not, then you can take your company to the broader market.

I advised Tom there was no downside to first negotiate with this buyer who had been interested for over three years. If the right deal can be put together, that’s great. If not, we’ll take the company to a broader set of potential buyers.

 

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from HarvardBusiness School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 .  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the names and fact patterns are changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."

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