All entries for Saturday 01 May 2010
May 01, 2010
Your Great Uncle died and left you a company that you have neither the time nor inclination to run – hence you want to sell. Set out the options for which type of buyer might be interested and the differences in likely value that they might place on the business. Conclude by deciding which buyer you hope will buy it and describe why.
My uncle has been running a small company with gardening services. Business was running generally well, that part of the country is mainly inhibited by middle and upper class families with big family houses and gardens. Several TV programs popularized gardening and created demand which has kept my uncle’s company busy over the last 5 years. There is one more company of a similar size providing gardening services in the area, however mainly large garden centers has started to offer the same services as part of their portfolio. My grand uncle’s company has 30 employees and in the management of the company there are several family members.
First of all, given the fact that I am not interested to keep ownership of the company and my main goal is to sell it, I would need to run an assessment to understand the value and determine the price of the company. There are several ways how this can be achieved:
Price to earnings & Price to revenue ratio – this method is difficult to use in the given business environment and market as information for comparable companies are challenging to obtain. It might be possible to search outside of the area in different part of the country if there are such companies and such information available
Net value of assets – calculation in this method ignores the firm’s future profitability, which is a drawback, however it is worst case scenario and with the given situation of the company it can be realistic and useful. Growth potentials for the business are minimal and there is a threat and pressure from larger players which appeared in the market (garden centers).
Present discounted value of free cash flow – does not account for a risk of future revenue & cost performance. The current company’s performance is very stable, however pressure is expected for the future as mentioned above. Therefore outcome of this method might be on optimistic side.
Probably a combination of methods above is best to determine the price of the company. Net value of assets in combination with present discounted value of free cash flow method are more suitable and realistic.
There are several strategies and methods of exit. I am leaving out options of siphoning cash, partial harvest and exit, employee stock ownership plan and an IPO as these are more suitable for harvest rather than exit. My main focus is to sell the company as soon as possible on the best terms.
Transfer of ownership in family firms – as already mentioned there are also several family members employed in the company and some of them are in the management team. Transferring the business to family has its positives and negatives. Family owners would probably be more passionate and dedicated. Tradition would remain in the family. However, on the other hand: do the family member posses necessary skills to run the business? Wouldn’t the family members get into power and control games instead of looking after the future and health of the company? Some due diligence is required firstly. In any case I am in a tricky position now as if I don’t consider family members for the future of the company I am risking that they leave and form a new competition. From selling price perspective I am certainly going to face troubles in getting the best possible price. Family ties will not enable me to push for higher price.
Merger, acquisition or trade sale – in this option I am looking for generating value added, which would be either synergies or economies of scale, or both. This will secure that I am getting the best possible price, which would range from a low of the value of the seller’s independent business to a maximum of the merged value (seller and buyer) minus the independent value of the buyer’s business:
Selling the business to other small company operating in the region will not create many synergies as the operations and business strategies are very similar. It would help to create economies of scale to a certain extent as it would practically involve mainly selling the customer base. In this option I can push for a maximum price as for the competitor gaining my customer base and buying my business can be a matter of survival. If we don’t agree and I sell my newly inherited company to one of the large garden centers, my competitor is going to get under the price pressure as garden center do benefit from economies of scale. On the other hand, the company might be already aware I am desperate to sell, therefore can still afford to negotiate. The question also is: is my competitor financially viable to pay what I am asking for?
If large garden centers are interested in buying off, it would mean synergies as I am offering difference in business strategy based on personalized approach and tradition. This option offers both types of value added as at the same time economies of scale can be achieved. In terms of best selling price this situation is also not ideal, as they might be already aware of me being under pressure to sell, also they can chose to make an offer to my competitor and push the selling price down. In any case my business is interesting for them and I can expect the best selling price from this option.
I can also look into option of selling the business to companies outside of the region. Potential buyers would be gardening services who are planning to expand and grow to national level. They can also achieve both: synergies by gaining access to customers in the new region and economies of scale by enlarging their customer base. This option also can provide good selling price.
Management buy out – is an option with similarities to transfer of ownership to family, also because there are some family members in the management. Again some due diligence is required to determine the capabilities and plans of the management team. In this instance the selling price can get under pressure as the management team is fully aware of the situation and that I need to sell as soon as possible under the best term. Also, if I decide not to, management can take an option to leave and form a competition. In this situation I am not able to achieve the best selling price as management is well aware of the situation I am in and also they know the situation of the company very well.
Management buy in – is improbable option, however if it does occur I would need to understand the intentions of the buyer in the first place. I am risking the company falls into ownership of a completely new team, which is new to business with practically no experience and experts in management team. I assume the management team of the company would leave, or at least part of it. Selling price would be conditional to the intention of the new management, however it can be very favorable, although the word of me being under pressure to sell fast might have already spread.
It is not straight forward to determine the best option from above exit methods.
As a first step I would have a word with the family members in the management to understand if they are interested in buying out the business and on what terms. I would certainly try to avoid situation that I lower the selling price for the sake of maintaining the business in the family, while the new owner would sell it off in a short period of time for a much better price. In cases of management buy out and buy in I would have similar concern. However, I would look into these options as a first instance.
As a second best option I would negotiate with the garden centers or buyers from outside of the region, as here the best value added might be achieved.
As a last instance I would seek agreement on a sale with competition. Least value added is achieved in this exit option.
Burke, A. (2009). Warwick MBA: Entrepreneurship and New Venture Creation. Coventry: Warwick Business School
Bygrave W.D and Zacharakis A (2004). The Portable MBA in Entrepreneurship. 3rd ed. Hoboken,