The “fair” market value of a business is defined as the amount a buyer & seller, equally motivated to complete a transaction, will agree to in a “good faith” negotiation where both parties possess an equal amount of knowledge.
In a business school classroom this definition is conceptually accurate; however in the “real world” of mergers & acquisitions, it is a standard that is traditionally unobtainable because knowledge, experience, and skill are not commodities that can be balanced on a scale.
An intermediary’s goal when representing a privately held company or family business for sale should not be to sell at a “fair” market value, but to sell in a “win – win” transaction.
A “win-win” transaction has the following components.
Environment of Full Disclosure – The foundation for facilitating a “win-win” transaction is the creation of an environment of full disclosure. The creation of this environment starts with potential business buyers, after being properly vetted & prequalified, being provided with detailed & accurate information about the acquisition opportunity. Negotiations commenced from a position of knowledge have a greater probability of achieving a desired outcome than negotiations commenced from a position established on assumptions & incomplete information. Full disclosure about a business also benefits the seller by creating a safe harbor that mitigates post transaction liability. Basically stated, if a business buyer was aware of the information prior to the completion of the transaction, the information cannot be used as a vehicle to hold the seller accountable for the performance of the company post transaction. An environment of full disclosure should also be created for the seller with regard to the buyer in terms of the potential business buyer’s experience, knowledge, and financial strength, so negotiations can be facilitated in “good faith” relating to price, institutional or seller financing, and transition training.
Professional Advisers – The purchase or sale of a privately held company is a sophisticated process requiring knowledge, experience, and a strong negotiation/facilitation skill set. Few entrepreneurs individually possess these attributes at a level sufficient to complete a transaction without representation. The most common professional advisers employed by parties in a transaction involving a privately held company or family business are an attorney and accountant. These professional advisers possess knowledge about the law, accounting, and taxes that is traditionally higher than the individual entrepreneur. It is our strong recommendation at IBA that all parties involved in transactions consult with an attorney and accountant during the transaction. Another great source of knowledge & experience for a party involved in a business purchase or sale is a business broker. An experienced business broker can provide their client with business valuation, marketing, negotiation, and deal facilitation ability & knowledge. This ability & knowledge is best learned through industry specific education, mentorship, and practical experience. Circumstances can result in the need for other types of professional advisers including business bankers, financial advisers, insurance brokers, and real estate professionals. It is always better to assemble too skilled a team than one that is missing important skill position players.
Proper Motivation – One of the first questions that should be asked by a buyer interested in acquiring a business is why the owner wants to sell. It is our preference at IBA to represent business sellers that do not need to sell, but want to sell. Common motivations for sale by our clients include retirement, an entrepreneur’s desire to do something else, partnership breakup, illness, or death. We are comfortable representing clients with these motivations. If the motivation is something other than the previously mentioned, a buyer should assess the risk to the business associated with the motivation for sale (e.g., relocation of the business required, loss of key employees or customers, replacement of capital equipment needed, etc.) prior to commencing negotiations. Similarly, an inquiry should be made to the buyer by the seller regarding why they want to purchase the company. A “win-win” transaction has parties negotiating from equal footing where both are motivated to complete the transaction, but also have the ability to walk away from the negotiating table if the terms are unacceptable.
If a transaction has the three components of an environment of full disclosure, professional advisers, and proper motivation on both sides of the negotiating table the opportunity exists to for the parties to shake hands and reach agreement in a “win-win” transaction.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation in terms of successfully negotiating transactions that are “win-win” in an environment of full disclosure between the parties.