Hierarchy of Buyers

Hierarchy of Buyers… who you sell to matters?

When you come to sell your company… who you sell to can have a massive impact on the price you get… so let’s take a quick look at the Hierarchy of Buyers… worst first.

Management Buy Outs (MBOs) … usually these guys don’t have the money to buy you out… so they borrow… and anyone who borrows money has the price they can offer capped by the bankers they borrow from

And it gets worse… bankers love doing MBOs but they hate the sight of you disappearing into the sunset to live happily ever after… so the earn-out part of the deal can be big… and loooooong…

There may be cuddly reasons you’d like to do this (legacy stuff/guff) but I’m talking getting best price here… so MBO is a no…

Venture Capitalists (VCs or PE)… these are pro’s who work ‘for sale sites’, accountants, lawyers et al to find opportunities… if they’re buying your company outright they’ll look to buy it low… goose it… flip it quick…

… and buy low is a no…

Competitors… they get what you do, should understand your value (may not be a good thing?!) and there’ll be synergies when you combine… & that’ll boost the value… (2+2 = 5)…

… if they’re buying ‘opportunistically’ then the price may not be great… (everyone loves a bargain, right?)… but if it’s strategic the price may be worth it…

Complementary… these are companies not quite in your space but it makes sense for them to move into it through acquisition… they’re likely to be strategic buyers… which means they should give any Competitor a run for their money when it comes to the price they’ll pay…

…. so much for the basics… you can see that to get a better price you want strategic buyers (not opportunists) with cash (no banks involved)

… but there are a couple of other buyer-characteristics that can boost the price you’ll get…… 

Overseas buyers… will definitely be making a strategic acquisition… and so pay premium prices

PLCs... there are a few reasons why stock market companies might pay the premium price you want  (e.g. their management might be using acquisition to hit City growth targets… & they’re not using their own money!) … but I’ll just quickly explain the PE game & how it can help you get the price up…

PE game… The value of a stock market listed company can be expressed in terms of a Price Earnings multiple…  where the value of the company is measured as a multiple of its profits…

… so a Plc with £1m profit and a stock market valuation of £20m would have a PE of 20…

You’ll have heard talk about profit multiples when it comes to valuing a private business… typically non-stock market companies may sell in the 2 to 8 x profits range… (I’ll discuss this in detail elsewhere)

Now, there are a variety of reasons why private companies have lower PE multiples than Plcs (e.g. governance issues )… but the main thing is that there IS a big difference… and you can exploit that to seriously raise the price you’d get…

Say your private company makes £1m profit… and a complementary private company has offered to buy you for £8m… that’s a generous top end multiple of 8 x profits

To a Plc with a PE of 20… £1m profit could boost their stock exchange value by £20m… so your £1m profit is worth more than £8m to them… and there’s no reason why they wouldn’t share a bit of that ‘extra value’ with you !

That’s the PE game… profits are worth more to a Plc than to a private company… & they’ll pay more for them…

Here’s another definition of the PE game

So… our ideal buyer is ... a cash rich, overseas, stock market listed company, operating in a complementary sector looking to strategically move into your space here in the UK

Better still… find a few of ’em… because…

Making a Market Matters… the more people after your company the better the price you’ll get… sometimes it’s easy to forget that basic principle when talking profits & multiples & earn-outs !!!

SIC Code

Quick SIC Code stuff

SIC CodeHere’s a fun site to help you find the right SIC code… SIC code Wiki

And here’s a blog post explaining why you should check it out… because Standard Industry Classifications matter..

Is your SIC code making your company credit rating sick?

You get to pick the SIC code that best describes your company’s activities… in fact you can pick 4… the Credit Agencies use the first one to pigeon-hole you & compare you against other companies with the same code… so make sure the first one of the four works for you?

Problems with Personal Guarantees…

Guarantee I don’t like ’em… never have done… and I think they stand in the way of decent companies accessing the external capital they need to grow.

There’s an example of the problems they cause in another post I did : The Problems with Banks… their attitude to security

So why does just about every lender insist on PGs?

I wish I knew…

I suspect it’s because they can.

They’ll claim it’s to take account of the risk involved in lending to an owner managed business… by ‘lifting the corporate veil’… because ‘if the owners aren’t prepared to stand behind their company why should we lend to it’…

BUT

… the interest rate on any borrowing is supposed to reflect the risk of lending…  so the risk premium is baked in… the riskier the company, the higher the rate…

So why don’t lenders let the rate really take the strain and offer borrowers a choice ? … say 4% over base with a PG… 6% over base without… (a ~ 50% premium for the extra risk)

I know which one the growth companies I work with would choose…

Which begs another question…

Where are the genuine innovators in the Fintech space?

Lots of clever people with a lot of smart money busy building sites & offerings… but I don’t see too much innovation… let alone disruption…

Incremental innovation aplenty… but if they want quality companies with growth prospects to take on the external capital that’ll make growth less painful & more fun then the Fintech guys will have to take a punt on being more disruptive… by being more responsive to the needs of their target market…

Say… offering money with have two buttons on the site… choice is a wonderful thing… one PG low-Rate… one no-PG high-Rate… and watch which one gets pressed…

But at the very least all these PG loving lenders should let you know you can get insurance against the chance your PGs will be called in…

PGI Cover from Purbeck covering up to 80% of your PG is available

One of the better-kept secrets…

Again I don’t why…