Many owners of medium-sized companies believe the most lucrative business sale option open to them involves selling their business to a large business. Sometimes this is true – sometimes not so.
In our experience there are a number of key matters that business owners and management should be aware of if they are anticipating a sale of their business to a large corporate. Most of these key matters relate to why large corporates make buying decisions. To know this enables business owners to reverse-manufacture their business to be best placed for a sale to large corporates. This article endeavours to address a few of the reasons why large corporates buy.
They sometimes buy to scoop up market-tested innovations
Is your company exceedingly innovative? Have you developed new, market-leading solutions to an old problem? Innovative companies with proven market traction are often seen as great investment opportunities for established larger companies. This is because larger companies are typically more risk averse than smaller more entrepreneurial outfits, and also because larger companies have a market-share that they need to maintain. Be careful though – larger companies aren’t after just any innovation. Your company’s innovations must be compelling, have commercial traction and upside and have scale or prospects of scale.
They can make a return on investment the instant they sign the cheque
Larger companies – particularly listed companies – have disproportionately larger valuations to their smaller counterparts. Most company owners and senior managers are aware of the tried and tested valuation method of
Value = Profit x Multiple
Using this formula, multiples on larger companies – particularly trading multiples for listed companies – are almost always significantly larger than those achieved in the market for medium and large privately owned companies.
This means, by application of pure mathematics, large and listed companies often achieve what is referred to as multiple arbitrage. In simple terms, this is the difference between the price they pay for your company and the value they get. With the difference in multiples achieved by larger companies in the market, this often represents significant value upside for larger companies.
What does this matter to you though? It can often compel larger companies to be more enthusiastic about completing purchases. Better still, it sometimes provides larger companies with more flexibility with respect to the price they apply to purchasing a smaller business, as they will reap upside when they sign the cheque one way or the other.
They can offer to pay you with their own shares (which is great for them and sometimes not so great for you)
Larger companies – mainly those that are listed – will often make purchase offers on the basis of issuing their own shares to the selling shareholders in lieu of cash. This provides the large purchaser with greater funding flexibility and by extension greater ease with which to complete business acquisitions.
In some circumstances this can work really well for company sellers – particularly in circumstances where the selling shareholders have an appetite to remain connected to their business and see a strong path to growth and greater value under the wing of a larger corporate.
For some company sellers though, these type of arrangements are less appealing – particularly where their burning desire is to receive most of the transaction proceeds in cash. Unfortunately too, most share issue transactions contain lock-up provisions which means it’s not simply a matter of the vendor quickly liquidating the shares they receive in the acquirer’s company.
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Groves & Partners are expert business transaction advisors and valuers, with significant experience in executing successful business sales for our clients. Many of the business sales we complete for our clients involve the sale of our client’s companies to larger corporates.