Why Are Great Companies So Hard To Sell?
So you’ve got a great company to sell that you’ve shepherded over the years, applied the lessons along the way, and today it’s generating revenues and well positioned for the future. It should be easy to sell and you won’t need any professional help, right? You’ve worked hard at it and you’ve “earned” the reward to sell quickly without much help.
As professionals who specialize in bringing buyers and sellers together, we often see more issues pop up when bringing an excellent company to market than an average one. I know that may come as a surprise, but you would be amazed at the number of issues a buyer can find with a truly great company and they are not shy about pointing them out.
I know what you’re thinking. Seriously? Am I about to make the case that it can be tougher to sell a great company than it is to sell a lackadaisical performer in the same industry? Yes I am. And I will also tell you why this calls for a seasoned team to put the deal together if you want the added value you built.
First and foremost, a truly great company will command more market value than the alternatives. The company typically has a strong reputation with quality management and ownership that won’t take a lowball offer. The company is healthy and under no time pressure to sell. It’s similar to going to look at a used car and finding that it’s well maintained, accident-free, a desirable color, low miles and there are no surprises or blemishes. Unless the owner is half asleep, buyers know they’re going to pay what you are asking, or risk the next buyer driving away with a great car, unless they can find SOMETHING. And boy do they look!
For example, if your great company has strong cost control, then the buyer accepts there is no easy opportunity to improve margins after closing. There is no low-hanging fruit in this important area. Or perhaps the company owns real estate in a highly desirable, fast growing city. This is great for the seller, but the buyer is hard pressed to negotiate that number down and thus acquire some equity in the business. Its demonstrably great property and real estate values are secure assets, so another dead end for buyers.
What if the company has intellectual property in the form of patents or perhaps a contractual market exclusive, which is another mark of a great company? Seems like a great situation, right? Well, that commands a premium price if other similar companies are not gifted with this advantage. But it becomes yet another justification for a higher offer price that is provable and the buyer has to pay for it. In order to own the company in this market space with the BEST prospects of protecting their market share and profitability after the acquisition, they have to pay a premium.
How about strong cash flow? A remarkable thing, this cash flow. Buyers always salivate because they want to use the cash flow to help them buy the company using an owner note. Makes sense, and banks love it as well as equity groups. Everybody loves it—right up until the offer comes in and the owner of the selling company takes 5 minutes on the back of an envelope to compare keeping his company to the offer on the table and realizes that even with a wheelbarrow of down payment cash, that a year after the deal, it doesn’t look so good. Here’s how that happens:
Say the company generates a net profit of $10M a year. A reasonable initial offer from a buyer’s perspective might be $50M and 30% down. So, 12 months out, a seller would have the down payment of $15M in his pocket, own no company, and be expecting the first installment of an owner note. If he keeps the company for a year, they’d earn themselves only a $10M check, but still own a company worth $50M. Suddenly the $5M difference in selling is not great enough and you have a seller balking at the table. It’s simple math that a great cash flow company may need a very large down payment to put the deal together—a challenge for certain buyers.
Then there is the great company that recently made a successful entry into new markets—that’s an accomplishment and an indicator of good management. The seller has taken a well-calculated risk, proven the potential and wisdom of the move, and wants the purchase price to reflect that future revenue. A buyer may not value it the same way and I have even had strategic buyers claim no interest in the new market because they want to focus on the core market they wish to dominate through acquisition. While rarely an impasse, certain types of strategic buyers will not value the marketing initiative and simply dump the new division or otherwise unwind it. Not what you expected, right?
How about a great company that recently entered into a lucrative licensing deal to share some of their IP? Surely that’s a no-brainer that any buyer would value, right? No, it isn’t. Licensing agreements are generally only examined in the latter stage of due diligence and you’d be surprised to know that sometimes buyers get cold feet because they worry this otherwise great company has watered down its potential by sharing the greatness. Nevermind the agreement generates profits! It can be a legitimate concern of a buyer that licensing agreements limit their after sale maneuverability and if the new owner improves the IP, the terms of the agreement may even force them to share that.
Don’t get me wrong. Great companies are wonderful engagements for us in this business. The people are a cut above, the business model is a thing of beauty, the legal documents display forethought, and the overall operation is simply a thing to behold. We whistle appreciatively while going through the document sets and call each other to share a remarkable tidbit here or a genuine source of admiration there.
However, the great company begets great attention and ordinary buyers will drop off like flies when they sense no flexibility and find no weakness in the story. It takes no more or less time to sell than an ordinary one, because a matching quality buyer will step forward at about the same statistical rate and they know what they are looking for. Things like proper pricing are more important than usual because the first attack will be the higher price, and your professional broker had better be able to back it up. I recommend you ask them right up front, “what’s great about my company and how will you use it to get the top dollar it deserves?” At Exio we answer that every single day with the best full story development of your company that even includes a professional video to tell it.
Sometimes, an average company with average costs, stable operations, and a few weaknesses can sell more quickly simply because the asking price is vulnerable to negotiation, and buyers will step right into that phase. If priced correctly, the average business has potential for a buyer to improve with their talent, capital, or other assets and enjoy a strong return.
So, what’s the lesson? Run an average company? Heavens no. Make it a great company—please! But know that selling a great company has its foibles. The higher price due will not happen unless you work hard at the end of your ownership—sometimes REALLY hard—like courageously and aggressively countering substandard offers or redlining unreasonable concessions. So, get competent professionals who are willing to roll up their sleeves and who know they must GET and EARN that added value for you. It will not fall in your lap, even with a truly great company.