José Antonio Cárcamo Hidalgo / Strategic area / November 2019

The sale of a company is not a normal sales process, like selling an asset or a property, for the seller it is the delivery of a precious asset, which has sometimes meant many years of effort and in the case of the buyer it is a business project where you not only acquire goods, but a business model, with people, clients, a brand, etc. In other words, it is a process with risks and opportunities, but above all, following the appropriate steps, a great opportunity for both.

The process of selling a company is one of the most important milestones in the career of an entrepreneur. All the more so if your business is successful and growing. Knowing how to find the ideal buyer for a company is a determining factor for a successful sale. But what is the best way to make the right decision regarding this issue?

The search for the best buyer and a good negotiation are key elements for a successful sale that reflects the well-deserved effort and work of the entrepreneur. Not only do you have to find a solid offer, but also a buyer who transmits confidence and tranquility to the entrepreneur.

Therefore, it is important not to make the mistake of selling the company to the first company or investor who makes an offer. The employer should not make this decision without having done a thorough search and a good analysis of all possible offers and opportunities.

On many occasions, finding the ideal buyer for a company turns out to be a complex, long and frustrating process. Therefore, it is important to answer the following questions:

• What kind of buyers are there?
• How do you know if your company may be of interest to a buyer?
• What is the most effective buyer search method?

The first step What must be given is to know the different types of buyers and their various interests for which a company can fit into a sale and purchase operation.

Type Providers

In most cases, a supplier acquires a company with the intention of vertically integrating and gaining access to a relevant customer of the acquired company.

Type Clients

The interest in acquiring a company by a client arises from the need to guarantee a secure supply in his favor, while controlling the prices of origin.

Type Foreign companies

Many foreign companies, which are entering a new geographic market, seek to acquire similar companies from the local area to facilitate the process of entry and cultural adaptation in the market.

Venture Capital Type

The main objective of venture capital is to enter sectors of high growth and opportunity. It must be taken into account that more than 30% of company purchases have the participation of venture capital.

Type Competitors

Most acquisitions by this type of buyer are part of a competitive strategy, being defensive against the participation of foreign companies with greater weight in the market.

Type Companies from another sector

A buyer from another sector may see fit to acquire a company that works with certain products and services that could fit into the dynamics of innovation and growth of their company.

Type New Entrepreneurs (startup)

An entrepreneur may be interested in an existing business, either to gain time to develop a brand in the market, for rights or licenses that would otherwise be very difficult to obtain, worker skills. In any case, the entrepreneur's business project will have to be at least similar to the business model of the company for sale.

Knowing the different types of buyers allows us to know what type of entities we should take into account when selling a company.

What second step is the identification of what elements make a company attractive to each type of buyer.

To know if a company could be of special interest to a buyer, the following situations must be thoroughly understood:

• Know the trends of the sector and the participation of the buyer in it.
• Know the distribution of the business lines of the potential buyer.
• Know the weaknesses, threats, strengths and opportunities of the potential buyer.

But how can this information be accessed? For this there are different analysis tools that can be very useful.

SWOT

It consists of the analysis of the weaknesses, threats, strengths and opportunities that must be carried out for the company, the sector and the potential buyer. This analysis will help us answer the following questions:

• What value and strengths can the company bring to a potential buyer in a certain sector?
• What value and strengths can a buyer bring to the company to create competitive synergy?

The final objective is to obtain an overview of possible fits that give way to a synergy between companies where the opportunities and strengths of both parties are taken advantage of.

Porter's Forces

It serves to know the most attractive sectors for a buyer. In this way, the entrepreneur can know if his company is in a favorable position to be part of a corporate operation, or not.

The factors that determine the attractiveness of a sector are the following:

• Companies within a sector with high barriers to entry usually have higher returns. Therefore, this type of sector turns out to be very attractive for a buyer.
• Companies operating in sectors with high customer power tend to be unprofitable. Therefore, they seek to acquire other companies to strengthen themselves and increase their profitability.
• The high power of suppliers in a sector increases the profitability of their companies and at the same time their level of attractiveness for a buyer.
• A sector with a lower level of threat from substitute products is more attractive to buyers.
• An industry without aggressive competitors is also more attractive to a potential buyer.

The Boston Pits

This matrix is used to analyze the balance within the portfolio of companies of a purchasing entity and to find out where its needs are. In this way it will be possible to highlight if a company has something to contribute to a certain group, which will result in a buying interest.

This matrix identifies 4 types of business groups that could be interested in acquiring a company for different reasons:

• Cash Cows: mature companies looking to acquire companies to maintain their position.
• Stars: companies looking to acquire companies to sustain their high level of growth.
• Dogs: Companies with little growth and profitability that will surely be sold.
• Questions: Companies that do not seek to acquire companies due to the level of instability in which they find themselves.

So far we have talked about the importance of knowing the type of entities that are usually interested in buying a company. We have also exposed how the dynamics of a sector influence the level of attractiveness of a company for a buying entity.

Finally, through different tools, different methods have been appreciated by which a businessman who wants to sell his company can know the current situation of his sector, and thus know what type of buyer to target.

The third step to know how to find the ideal buyer for a company is to analyze the main negotiation synergies that will make it possible to identify the best offer so that the purchase operation is a success.

The following concepts will help you:

Synergies

When a buyer seeks to reinforce its strengths through the acquisition of a company so that the whole is more beneficial than the individuality of the organizations.

Diversifications

Buying to diversify is intended to acquire companies outside the acquirer's line of business. This is done to enter growing markets with a lot of potential.

Access to relevant customers

Some buyers are looking to acquire businesses that will help them reach a specific customer that they weren't previously reaching.

strategic realignment

Many times industries change and companies in these industries seek to adapt through acquisition.

tax reasons

Some buyers look for companies with a high level of accumulated tax credit. The purchase of this type of company can avoid the payment of taxes for profits for a period of time to the acquirer.

Technological change

Technology changes many competitive factors and makes acquisitions a favorable option for a company's adaptation to a new disruptive trend.

Regulatory change

When government regulations change, the game changes. In these cases, an agile solution may be the acquisition of a company.

Purchase of undervalued assets

There are sectors that are in a stage of decline and the companies in it will lose value. For this reason, it is important to pay attention to the trends in the sector, since this can be a clear signal to sell a company before it loses its value.

Acquisition of unique resources or capabilities

A company can be highly attractive to a buyer because of its unique resources or capabilities that the buyer does not possess.

gain market power

For a buyer, increasing its market share will always be of great interest to strengthen its competitive advantage.

The fourth step , and perhaps the most important after choosing the ideal buyer, is to assess the operation.

Possibly you have a value in mind for your business, but for the buyer it is an investment opportunity and even if he is very interested and has the right type, in a situation of poor expectations in the markets or in a specific sector, if the final price is not in accordance with these expectations, it may lead you to postpone your decision.

Valuing an asset is usually a difficult task, but much more so if it is a company. Knowing the value of a company is fundamental, whether it is a purchase-sale operation, merger, spin-off, restructuring, etc., but also internally in order to face a strategy to create value and increase the value of its business. In some cases, it serves as a reference to evaluate and remunerate managers.

There are several methods of company valuation, we will make a quick summary in order to form a general criterion, since it is not the objective of this article.

Balance Based Method

It is the oldest method also called "static" does not take into account neither the evolution nor the future profitability of the company and takes into account only equity elements.

The value obtained is generally at market price, the debts contracted are deducted, in many cases adjustments must be taken into account for contingencies of a fiscal, labor, and environmental nature that reduce the value of the net asset.

In any case, this method can only be used in the case of businesses with significant assets or dormant companies with tangible assets, and should be the minimum value of the company being valued.

Cash Flow Discount Method

Also known as the “dynamic” method, and unlike the previous method, it takes into account the future benefits of a company or assets.

This method is generally accepted by valuation experts because it incorporates all the elements that affect the value of a business.

In short, it is about calculating "the free cash flow", the "Discount Rate" and the number of years of the financial projections (normally between five and ten years).

As a result, the "Value of Own Funds" will be obtained, to which the company's debt and other non-functional assets will have to be added or subtracted.

It is advisable to carry out sensitivity analyzes in order to adjust the discount rate to variations in the company's growth and profitability to market fluctuations.

Finally, an assessment range would be obtained from the sensitivity analysis.

Multiple Comparable Method.

It is a simple but effective method that is based on the comparison of certain variables between companies similar to the company being valued.

This method is generally used as a contrast to the earlier method of discounting cash flows.

The ratios and multiples that are normally obtained from the information in the annual accounts of the companies in the sector or, in the case of companies listed on the stock exchange, from specialized reports. Once the comparable companies have been selected, the multiples are selected to finally obtain a valuation range.

In short, it is a method linked to market values, based on the theory that a company is worth what someone is willing to pay for it.

To finish saying that the value of a company is not always the price, the value of a company is the result of the application of a methodology to determine a technically supported value in the most objective way possible, in many cases prepared by a specialized professional. . Instead, the price is the amount actually paid determined as a result of free negotiations between the parties.

The fifth and last step , is the formalization of the purchase-sale operation, in any modality, sale of shares, mergers, absorptions, spin-offs, capital entry, etc. Just as in the joint ventures approach, strategic alliances, business restructuring, in their final phase they must follow a legal formalization process.

In most cases, these closing actions are usually partly legal acts and partly financial acts, which depending on the legal and regulatory framework, can be more or less complicated, so it is recommended that the company is very well accompanied. of your advisory team.

We believe that regardless of the experience and needs of those involved in a purchase-sale operation, it can become a great opportunity, if they are freed from approaches, such as:

• A company is sold because of poor results.
• A company is sold because its life cycle has ended and it no longer has a future.
• A company is bought because it is an opportunity to make money at the seller's expense.

We understand that each company is a world apart, and both the buyer and the seller have their expectations and interests that change from time to time, and one way to address the risks and opportunities that will ultimately lead to a successful operation is to identify the objectives in each one of the five steps we have outlined and develop an action plan.

Experience tells us that all parties involved in a purchase-sale transaction win if the following objectives have been achieved:

• A selection of the ideal buyers or companies for sale.
• Identifying negotiation synergies between the parties.
• Objective valuation of the price and
• Closed the operation within the pertinent legal framework.

If you still have doubts about how you can find the best counterparty and manage a good purchase-sale negotiation, at JAC CONSULTING we put at your disposal a team of professionals who will dedicate themselves, with absolute transparency and confidentiality, to advising you during this process. Do not hesitate to contact our team.

With the collaboration of ONE TO ONE Partner of JAC CONSULTING