Split the difference, and double the value

If your business has both financial value and strategic value, it could be of interest to more than one buyer. By TOM McKASKILL.

By Tom McKaskill

There is considerable difference between the sales strategies of businesses that sell to a financial buyer versus those that sell to a strategic buyer. But what if you have the possibility of selling out to either?

Many services businesses face this particular quandary. On the one hand they might have a thriving consultancy or support business while, on the other, they have some good intellectual property.

The IP might be of value to a global software corporation, but they are unlikely to want the local services component. Alternatively, the services component might be very profitable and have good potential and be able to attract a very good price from a local acquirer.

Clearly it would be possible to weigh up the possible exit values of each potential buyer and concentrate on the one that has the highest exit value. However, what if you could do both – that is, sell the IP to a strategic buyer and the services activity to a local financial buyer?

Such a scenario is highly probable as long as there is a clear delineation of business resources that can go with each sale, and one is not dependant on the other.

For example, you might sell the IP to a US corporation and agree that your local services business could be allowed continue to support the current customer base. The local business might be able to negotiate a longer term agreement allowing them to continue to support new customers or to act as a sales and support agent for the global corporation, which would significantly improve its own sale value.

Firms that have strong IP, which can create the basis for a strategic sale, often get confused about what the buyer really wants. They too often consider their own company as a whole entity and not a collection of income generating activities that may have greater exit value when they are split out and sold separately.

The objective should be to maximise the value on exit of the whole, even if it is sold in parts and even if sold off progressively over time. Thus one part could be prepared for sale while other parts continue being operated normally.

We often fail to take into account the perceptions of the buyer. If we ask ourselves “what is the buyer really interested in?”, we can often gain insights into how the buyer will treat the business after the sale.

If the buyer is likely to close down parts of the business because they are a distraction from the main objective, these parts may be split off without affecting the sale price of the part the buyer is focused on. In fact, it can often be the case that a stripped down business, which only passes essential resources over to the buyer, can be worth more when the buyer is not confronted with the task of cleaning up a mess or closing down the parts they don’t want.

Start with the buyer in mind. Work out what a specific buyer wants from the business and how you might best package those parts that are of interest to maximise the value to the target buyer. Now, can you find a buyer for parts which the major buyer doesn’t want?

This strategy may allow you to split off several parts of the business into different value components that can be prepared for different sets of buyers. The overall sales value can often be significantly greater than what any one buyer would generate.