EXIT STRATEGIES: Creating competitive tension

In order to create the right conditions for a sale, the firm needs to satisfy two conditions: have time on their side and have more than one potential buyer.

The classic ‘fire sale’ occurs when the firm is under pressure to sell. This often occurs when they are under pressure to find cash to satisfy creditors. It does not, of itself, mean the firm is unprofitable. A firm can have a healthy profit position and a healthy revenue position and yet still find itself short of cash to meet contractual obligations.

Under pressure, the firm may not have a choice and thus be forced to sell to a buyer which can satisfy its obligations. When time is short and little preparation has been undertaken, the likely outcome is a sale at a hefty discount to the buyer.

To create the right conditions for a sale, the firm has to have time to negotiate and to pull back from a deal. The best conditions are created when the potential buyer urgently needs to fix a problem (threat) and the firm has no need to sell.

This can often result in a very high premium on the deal. Pre-sales situations can often be quite disruptive to continuing business thus the firm must manage the revenue and costs very carefully so as to not weaken their ability to delay the sale if that can create more tension in the buyer.

The best situation for the firm to be in when entering a sale negotiation is to have alternative buyers. Each potential buyer may have quite different reasons for doing a deal, however, by having more choice, the firm can create competitive tension and push the price up. Any firm entering into negotiations will want an exclusive right to enter into due diligence and detailed negotiations.

This is a reasonable position to take due to the expenses which the potential buyer will incur. However, that does not preclude the firm from negotiating the business terms prior to agreeing an exclusive arrangement. The firm can also sometimes negotiate costs if the buyer decides to withdraw.

Competitive tension can only be really effective if the alternatives are real and not just illusionary. Thus a stable of potential buyers needs to be created well in advance. Where the firm has personal contacts at the right level, this is more effective. When entering into a potential deal, the firm simply contacts the other parties and informs them that negotiations have commenced and that it is likely a sale will occur. If they wish to participate as a potential buyer, they are then put on notice that time is of the essence. This situation can occur either proactively or reactively. The firm might be approached by a potential buyer and see that initial negotiations will take them to a reasonable sale position.

Having committed to the process, other potential buyers should be notified that the sale process has started. Providing that relationships have been built in advance and the acquisition potential of the firm is well understood, other parties should be able to put their own acquisition process into action.

Example:

DAYTON, Ohio (AP) – Board members of Elder-Beerman Stores Corp. said the retailer will accept an $82 million offer from Bon-Ton Stores Inc. unless rival suitor Wright Holdings Inc. raises its offer by early next week.

The Elder-Beerman board met Thursday after receiving the offer to merge the Dayton-based retailer with the York-based Bon-Ton for $7 per share.

Elder-Beerman and Bon-Ton entered merger talks in late July, about a month after the Elder-Beerman board agreed to sell the company to Wright Holdings, a subsidiary of Goldner Hawn Johnson & Morrison of Minneapolis, for $6 a share.

Under terms of the agreement with Elder-Beerman, Wright Holdings has three business days to raise its bid. Goldner Hawn’s managing director, Michael Sweeney, has said his company remains committed to acquiring Elder-Beerman and keeping its current management and operations intact.

Source: https://www.observer-reporter.com/ accessed September 7, 2003

In a strategic sale valuation is problematic. You will no doubt want to have some idea of what the business is worth going into a discussion and your shareholders may want to have this information before they agree to a serious negotiation. However, when the value is based on what the buyer can achieve rather than what the net worth or the profitability of the firm is, this presents the entrepreneur with quite a dilemma. You actually have very little idea of where the final price will settle because it depends on the competitive bidding and the size of the opportunities for the potential buyers. There are, however, some strategies that you can use to assist you.

First, you need to uncover how your business will create value for the buyer. In your discussions with each potential buyer, you should be finding out how they will leverage your strategic value. While they might be reluctant to disclose this, you will no doubt be discussing issues around key staff, product roll-out, scalability of the opportunity and the role you and others might play in that activity. Thus there is a good case for an open discussion. How can you best help them exploit the potential? What more could you do to make it effective for them? What role would they like you to play and how can you make it work for them as well as you? Teasing out some of these issues will help extract information on the size of their opportunity.

Outline what it means if they’re not the winning bidder

Next you need to establish the impact on them of not being successful with the acquisition. What happens if some other corporation is successful in acquiring you? Does this damage them in the market place? Will one of their competitors gain an advantage on them? They need to understand the opportunity which they will lose as well as the competitive impact on their corporation if they are not the successful bidder.

No doubt they will be reluctant to provide this type of information but it is essential for your positioning that you establish as much of this as possible, then you can keep reminding them what they are losing by not being the winning bidder.

It will still be near impossible to establish the final price but at least you will have some parameters around which to work. You might wish to set a minimum price which is acceptable to all shareholders. As long as the minimum is at least where you would be willing to undertake the sale, anything beyond that is a gain. Remember also that if you walk away from the deal, the same opportunity may not come again.

Sometimes it is better to take the money and start a new venture and do it all over again than to not sell and then find that the opportunity does not present itself again or the firm gets into trouble and you are not able to create the same competitive tension next time around.

This is a negotiation game and certainly experience helps. Get the best people on your side you can and give it your best effort. You can always walk away from the negotiating table if you cannot achieve a good result but always remember that you may not have the same opportunity next time round. Too many entrepreneurs set their sights too high and then later regret not taking the money when it was offered.

If you have put in the time to prepare the ground, have connected with the right potential buyers and have uncovered the opportunity for them, you should be in a very good position to do well in the negotiation. In the end it is all about preparation.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.