Most buyers looking at acquiring on-market businesses start out with a healthy dose of excitement and enthusiasm. Particularly when you think you have ‘hit the jackpot’ and find the perfect match. However, just like with all match-making, the more you look under the surface, the more complex the picture. First impressions rarely last long. Even the most optimistic of business buyers will experience many frustrations in attempting to acquire a business for sale.
This article explores a number of problems with acquiring on-market and gives you some tips on how to tackle them.
The reason why most businesses struggle to sell is that many are not really saleable in the first place. The underlying motivation is often exasperation as owners reach their energy ceiling.
The challenge for the business buyer is that, from the outside, it can be difficult to spot this problem. Sale advisers train vendors to paint their business in a most favourable light. They develop a carefully prepared narrative of their reasons for selling their company, and avoid answering difficult questions directly.
Buyers should be cautious! Don’t take everything you are told about the reasons for a business sale at face value. Ask questions, scrutinise, particularly when business growth has stalled, or is even reducing. You should always have a credible reason for why the vendor wants to sell. If you don’t, then walk away.
On-market vendors with sale advisers or brokers have another common disease: overvaluation! Exuberant sale advisers often inflate valuation to secure client signatures, and therefore the first number you are often told is way above the market value of the company in question. The challenge here is that this has become the clients’ expectation.
A more pragmatic valuation, however reasonable, can be a rude awakening for the vendor. It can be considered insulting and even be rejected immediately. In some cases, it may scupper any chance of further dialogue on a deal. The vendor is unlikely to form a favourable view of a lower offer from a buyer unless the buyer is able to provide justification for their belief that the business is overvalued.
Flawed valuations require a fine-tooth comb to isolate the cause of the inflated valuation. Then follows a careful process of dialogue with the advisor, or vendor, to try to challenge some of the projections, multiples or assumptions. It’s a tough balancing act.
Sale adviser or brokers are meant to make the process of buying a business easier, but this is not always the case. At times they can slow the process, and occasionally impede genuine expressions of interest or offers.
It is important to first understand that they represent the business seller. However polite they are, the aim is to achieve a deal being at the highest possible figure. Not only because of optimistic valuation but also because they are paid commissions which are a percentage of the sale price.
Therefore it is not unusual for them to engage in disruptive tactics for the benefit of their client, such as creating competitive bids that don’t exist, giving false deadlines and ultimatums, taking time to share financial information and not giving clear answers to direct questions.
Most see this activity as part of their role to realise value for their client, but experiencing it from the business buyers’ side can be immensely frustrating.
Therefore is it any wonder that 90% of people looking to buy a business never completed a deal? When you consider the challenges of on market corporate search work it’s not hard to understand why.
When acquirers find an ideal target it’s often a ‘sweetheart’ deal, where there is only one buyer and one seller. Most buyers contacting us with a sweetheart deal, however promising it seemed, see the deal fall through during due diligence. This can be for a host of reasons: another party becomes interested, the financials supplied were obfuscated to help the company sell, or the business performance has dropped because the owner has taken their eye off the ball.
Whatever the situation, with only 2% of businesses in the UK listed for sale there are slim pickings for those acquiring on-market. Buyers end up fighting over scraps.
Most business buyers don’t realise one important fact. One in three current business owners, when approached, would be willing to discuss the sale of their company. That’s right, businesses not for sale (normally termed ‘off market’) are actually for sale, and there are further benefits:
Looking off-market opens up the opportunity to reach the 98% of businesses that no one else is speaking to. By actively researching and finding more precise business targets buyers end up with many more options. Giving you more alternatives, better matches, and ultimately putting you in a stronger negotiating position.
Being in direct contact with business owners allows the acquirer to have direct dialogue with the vendor. This means that many of the headaches with acquiring on-market: overvaluations, negotiation subterfuge, lack of clarity and clear answers to direct questions, are not present in these conversations. It is much easier to get to a firm decision, either way and the overall process has much greater transparency.
It’s refreshing when in a direct dialogue with another business owner, things move quickly. Valuation is a joint effort. They will often answer questions more efficiently, without vetting, and financials are more complete with a more honest dialogue about the future. Without the pressure of immediate financial gain, it leads to a smoother transfer of responsibility.
Unloq helps business owners and entrepreneurs alike find, reach, analyse, negotiate with and acquire the 98% of businesses that aren’t listed for sale. Our off-market acquisition searches will help you find great opportunities and acquire them on favourable terms.
If you’re interested in having a free and confidential conversation about this, then call us today on 01962 609 000.
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