Wow did I get a real world demonstration of the saying, "Beauty is in the eyes of the beholder." If I could rephrase that to the business sale situation it could be, Strategic Value is in the eyes of the singular buyer." We are representing a small business that has a patented and somewhat unique product. They have gotten distribution in some hardware store chains, Lowes, and are going into WalMart next spring.
The owners are at a cross-roads. To keep up with their growth in volume they recognize that they need a grand capital investment. They understand that they have a window of chance to accomplish a meaningful footprint before a much good capitalized competitor produces a similar goods and undercuts their price. Ultimately they perceive that a one goods business at a big box retailer is quite vulnerable to the definite rotation of buyers or a convert in course that bumps them out of 25% of their sales volume.
LOWES SETTLEMENT
The good news is that their goods is unique and is protected for 15 more years with utility patents. It is not a commodity so it achieves healthy margins. The goods is an eco kindly goods so the retailers value that. Finally, the goods can be used in retailer programs where it is combined with other same class products for the spring tune up and the fall tune up. It helps drive the sales of other products.
The ideal business buyer is a larger business that provides products in the same class and sells to the same retailers. They could plug this goods into their existing distribution channel and immediately drive added sales. They would progress their position within their accounts by offering an added product, a unique product, an eco kindly product, and a goods that would promote companion goods sales. It would also contribute a unique door opener to other major accounts that would want this unique product.
With the input from our clients we located a handful of companies that fit this profile. We were pretty excited at the prospects of our possible buyers recognizing all of these value drivers and development purchase offers that were not based on historical financial performance. The book, memorandum, confidential business review, menagerial summary, or anyone your business broker or merger and acquisition advisor calls it, will unquestionably point out all of the strategic value that this business can contribute the business that is lucky adequate to buy it.
As part of the buying process we regularly distribute the book and then get a round of added questions from the buyer. We submit those to our client and then contribute the answers to the buyer with a invite for a argument call. We had moved the process to this point with two buyers that we thought were similar companies. The two argument calls were totally different.
The first one included the Merger and Acquisition guy and the three top habitancy responsible for the goods category. Their questions unquestionably indicated that they were used to being leveraged as a commodity provider by the big box retailers. Why were co-op advertising costs so high? Were they required to do that again in order to stay on the shelves? Were they on the plan-o-gram? Was WalMart demanding that they be at a lower price than Lowes? What about shipping expenses? Why were profits so low? We had a very bad vibe from these guys. They were refusing to recognize that this was a high gross margin goods growing in sales by over 200% year over year and had a higher level of promotional cost than a mature commodity goods line. We couldn't settle if they just didn't get it or were they being dumb like a fox to dampen our value expectations.
The second call from the other business included the Merger and Acquisition guy and the Evp. The whole tone of the questioning was different. The questions focused on growth in sales, pricing power, new client potential, growth strategy, their status at the major accounts, remaining life on the patent and what their strategy was for new categories and markets.
Well we got the introductory offers and they could not have been more different. The first business could not get beyond evaluating the acquisition as if it were a mature, commodity type goods with paper thin margins. Their offer was an Ebitda many bid without taking into observation that the goods sales had grown at over 200% year over year and the marketing and promotional expenses were heavily front end loaded.
The second business understood the strategic value and they reflected it in the offer. It was not an apples to apples comparison, because the second offer was cash at close plus a considerable earn out component while the first offer was all cash at close. However, the conservative mid-point of the combined cash and earn out offer was 300% higher than the offer from the first buyer. This was the biggest disparity between offers I have ever experienced, but it was quite instructive of the necessity to get many opinions by the shop of possible buyers.
There are some companies that no matter how hard we try will not be perceived as a strategic acquisition by any buyer and they are going to sell at a financial multiple. Those companies are often main street type companies like gas stations, convenience stores and dry cleaners that are acquired by private buyers. If you are a B2B company, have a competing niche, and are not selling into a commodity type pricing structure, it is foremost to get many buyers complicated and to get at least one of those buyers to talk the strategic value.
Capturing That Elusive Strategic Value in a enterprise Sale LOWES SETTLEMENT
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