Going to Market Without a Price
 
As is typical at this time of year, we are seeing a significant amount of transaction activity.  Not only are we receiving year-end financial data from existing clients, but potential clients are providing information relative to valuation in anticipation of going to market.  Because valuations are front and center covering a significant portion of the surface area of my desk, I thought that an appropriate topic for this month's article should at least be somewhat tangential to valuations.
 

Although we value every business that we represent, we may have a conversation with our sell side clients about the advisability of going to market without a price, which is confusing to some buyers and some sellers.  With the goal of eliminating some of that confusion, I will share the thought process that we go through in advising our clients relative to going to market without a price. 

In most cases, the decision is fairly simple, as in discerning black from white.  It is with the middle portion of the spectrum, the multiple shades of gray, that the decision becomes more challenging.  For smaller, less complex businesses with fairly consistent earnings, we would typically advise a potential seller to put a price on the business.  More likely than not, most buyers, their advisors, and lenders will look at that type of transaction in similar ways and come up with the about the same value.  Additionally, for those types of businesses in which the buyer may have less experience in buying a business, not having a price may confuse the buyer to the point that he or she abandons further investigation and moves on to pursuing the next deal.

On the other end of the spectrum, for larger more complex transactions where the buyer is more likely to be an industry acquirer or a private equity group, we would typically advise the client to go to market without a price, as the buyers are likely to be experienced in that type of process and the business could have different values for different buyers due to market synergies.

It is those in-between situations that experience and an understanding of market conditions come into play.  For those businesses in the gray areas, we could consider several factors in advising the client.  These factors include the trends of the business. If a business has a history of strong growth, we would be more likely to advise going to market without a price. If market conditions were strong, as they are now, we would be more likely to advise going to market without a price. If the business was in an industry with favorable demographics, such as healthcare, we would be more likely to advertise going to market without a price.  Another factor that we would consider is the time line the seller has for selling a business.  If the seller is motivated or compelled to sell the business in a shorter period of time, we would be less likely to recommend going to market without a price, as the controlled auction process can be more time consuming.

(originally published in March 2014 eNewsletter)