How to use competition to boost the price of your business?
The price of a business is inherently related to the future cash flows of the business. However there are other things that can be done to boost the price in your favour, and a good example is to create competition or demand for your business. Auctioneers have used this age-old technique to boost the final price for property.
Essentially you are playing the desire for one bidder to want to own the property against other bidders. It is no different when trying to sell a business.
A good example of this that is playing out on a global scale is the battle for confectioner Cadbury. They have received a hostile offer for the business of $US16.7 billion, which has been rejected by the Cadbury board as not representing the fair value of the business. Now other companies have emerged from the woods as potential suitors. These include Nestle, Hershey Co. and Ferrero.
It has already been reported that Hershey will need to offer at least $US17 billion, and if Kraft really want the business they will need to offer more than this.
Another recent example of how competition intensifies the price is the fight for ownership of Axa Asia Pacific between AMP and now NAB. The new NAB offer of $4.61 billion may trump the $4.46 billion offer made by AMP.
So how can small business gain a similar advantage when preparing to sell their business? How can a small business create a bidding war among potential suitors?
There are several ways to achieve this – some that come with very big risks if implemented incorrectly:
1. Identify and approach potential buyers yourself.
This is a high risk strategy that could see your business destroyed, or accepting a lower than acceptable price as one buyer decides to leave the negotiating process at the wrong time.
2. Anonymously advertise.
Advertise in a number of different areas such as different locations or regions that may attract businesses wanting to expand, or promotion in a number of different channels such as different industry association magazines.
The key risk of this approach is broadcasting to your customers, staff and competitors that you are up for sale. This can prompt a lot of responses that can damage your business and significantly reduce the price you could get for your business. Great care must be taken with this approach.
3. Appoint a business broker, accountant or advisor.
Use an intermediary to approach businesses and potential buyers on your behalf.
This is low risk approach as long as the advisor does not reveal who the potential vendor is and that they have the right connections and networks to access potential suitors.
4. Develop key strategic alliances.
Strategic alliances with a number of potential suitors can be developed 2-3 years in advance of your planned or potential exit period. Potential acquisition opportunities can then be discussed with a number of alliance partners at the right time once they have come to know you and understand your business.
This can be an attractive low risk approach that may also deliver business opportunities that enable you to increase profits at the same time. But you must also be careful not to be seen to be deliberately playing one alliance partner off against another as this may destroy any trust you have built with them.
5. Regularly publish and promote your business successes and strengths.
Promoting your business to your competitors or potential suitors will make them take notice. In the current climate this will often attract unsolicited offers without you approaching anyone. The key is to be able to attract multiple offers to generate the competitive environment. In some cases if you attract one offer, you may then be in a position to approach their competitor via an intermediary or advisor, creating a potential bidding situation.
This is an attractive but long term approach. You must have some successes to promote. But you must also be wary of “low ball” offers – the first offer is usually the “throw away / cheap price” offer. The key in this circumstance is to be ready for the offers and know exactly what your business is worth under a number of scenarios.
We found in a recent survey we conducted that over half the businesses had received offers in the last 12 months. Supporting this finding was a another recent survey Ernst and Young conducted that found that nearly 30% of Australian companies plan on making an acquisition in the next six months.
The message is very clear – if you are considering an exit from your business you must be ready as the next 12 months will provide a lot of opportunities. Without a well developed plan you run the risk of giving away a lot of value you have worked hard to create.
If you want to learn more about these options or assess opportunities you may have to develop strategic alliances with the businesses in your sphere of interest then contact Maxell Consulting now. We will sit and carefully listen to your issues and situation and give you an honest assessment of your options to act.
You may also want to get an idea of what your business is worth so that you are prepared when someone makes you an offer - our Your Value Now service can give you answers with only a 1 hour phone call. Click here to learn more