Selling a business in a downturn
Gregg Pendlington, Partner of Dow Schofield Watts’ North West corporate finance team, outlines five ways for vendors to motivate a buyer in an economic downturn and achieve the best price
In an economic downturn, business confidence decreases and buyers become naturally more cautious. With less competition, prices start to adjust and buyers that are still active in the market can find themselves in a position of strength.
It is more challenging to sell a business in these conditions and vendors can be tempted to delay the process until the economic outlook brightens. However, the fact is that opportunities exist in any market and there may be even more reasons for owners to press ahead with a sale right now.
Perhaps your industry performs well in a downturn, and your business is bucking the trend. You may have already delayed selling and do not want to wait any longer or, due to personal circumstances, feel the timing is right now. It may be the right time for a buyer too – there could be any number of reasons why they may want to take over your business at this particular point.
For those who are trying to sell a business in what is arguably a buyer’s market, the key to success is to strike a balance of power and strengthen your position. Here are five ways to help you stay in control of the process:
- Identify strategic buyers
Most businesses will have an idea of who their strategic buyers are, and will often already be dealing with them in some way. It is these strategic buyers that you want to target, as they are the ones with the biggest incentive to buy your business as they can achieve the most benefit.
Remember it is the quality of buyers – rather than quantity – that counts. Don’t cast the net too wide as the more marginal prospects are often the ones who are more likely to stray from the agreed deal, process or timelines.
- Maintain a competitive process
With fewer buyers in the market, some will try to exploit their position. Beware of those who try to gain exclusivity by offering an attractive price or structure. It is best to have a number of potential buyers in the frame, as they are less likely to risk losing the deal if they know they have competition.
- Commission your own due diligence.
Carrying out ‘vendor due diligence’ will alert you to any potential issues and help you maintain control. It is better to be aware of any ‘flags’ at the outset rather than them being identified by a buyer in their due diligence. It also helps you maintain the competitive tension as the report can be shared with other potential buyers as opposed to being beholden to one party’s due diligence provider.
4. Demonstrate the synergies
Ensure the different parties understand the true value they could achieve from buying your business by exploring the potential for cost savings, cross-selling opportunities and so on. If you can put a figure on it, all the better as it can add value to a competitive process.
- Agree on legal “heads of terms” at the right time
This will provide a legal framework for the process and reduce the number of factors that a buyer can exploit to change terms or challenge the price. It allows you to shake hands with the desired buyer on the main tenets of the deal while maintaining the competitive dynamic.
In reality, businesses continue to change hands throughout the economic cycle but for those trying to sell in a downturn, addressing the balance of power is key to completing the deal and achieving the best price.