The way It Is

Why and how shareholders sell

Shareholders usually sell because they’re tired.

The trick to find what they’re tired of. Tired of working with the team that got them this far? Tired of working? Tired of being in the Championship when they could be in the Premiership? Tired of covering all the bases when they’d rather focus on the fun stuff? Tired of being pulled away to or from family issues too much? Tired of not having the resources or cash to really crack on? Tired of facing the same old track for another few years? Tiredness usually springs from a life event restoring a sense of proportion to someone’s life. Spouses, partners or children facing illness or death are extreme examples, and the range of triggers is infinite, but sellers usually sell only when their priorities have been challenged and changed.

A recent example: Having been invited to the CEOs office of a successful services company to discuss an approach by a major conglomerate, the meeting was dominated by a high energy pitch from the CEO on how successful they were, how energised he was and how much potential both he and the business had going forward. The office was enormous – one of the corner top floor mahogany play pens that are typical of businesses ten times the size. Most importantly one whole wall was adorned with sporting trophies, three deep and gleaming. Clearly the words were not matching the environment, and the business was definitely for sale - and now. This CEO was bored, frustrated; his mind was not on the job and he had started spending the proceeds already.

All the text books tell you that shareholders want to maximise their returns, which most people assume to mean get the largest amount of cash possible. It is never this easy.

Owner managers are usually aggressively clear about what they want, and the major issue as a buyer (and a seller) is not to get sucked into a number too early. The biggest fear of any selling shareholder is that no real offers materialise. The key point is that this is a “toggle” issue, not a sliding scale. Buyers will either stump up a lot (in the eyes of the buyer) or nothing at all, and most simply don’t stump up at all. It is immensely frustrating for sellers to go through a sale or flirtation process for it to result in no deal. The downsides are also enormous. Sellers will have revealed their business model to close rivals, they will have doubled the hassle for their internal reporting and management processes, and wasted an enormous amount of time.

The key to avoiding this nil all draw position is to get the basics done first – well before any numbers are called for. If the chemistry isn’t there, even if a deal is agreed numerically, it will still end in tears. For sellers, they need to know that the partner they are entertaining has the clout to make a credible offer. There is no such thing as a value for a business. There is only a price that an interested party is prepared to pay. The best handle on value that a seller can get is to have one or two interested players making offers formally.

Time and again I have seen smaller entrepreneurs sailing close to the wind going into the sale flirtation process to get an informal indication of value. This usually results in a useless range indication, but if they push their luck they can get some offers which they typically then ignore. This is fine in so far as it goes, and it is their prerogative to walk away. However, the seller has to be very careful that the supply of willing buyers or potential buyers is not limited. Jilted buyers usually fail to trust a seller who has been round the track in the past.

Sellers shopping around in this way should be aware that different types of potential buyer buy in different ways. Trade players typically don’t haggle much – they either make a bid or they don’t. They will know the sort of multiples their rivals use and will rarely shade over it by much if at all. Institutional investors and listed companies offering "paper" (ie their shares instead of cash) deals will typically offer at least twice what the trade players do initially, not because they mean to pay it, but because they think money talks. Bankers are used to the scenario where a bid range is asked for, and they then spend the next few months whittling it down to somewhere below the typical trade bid. Ask a banker and you may be told a ten multiple, ask a trade player and you may be told x5. Big deal – the secret shopper still doesn’t know any more than they did in the first place. The key issue is whether a bid will materialise at all – and usually they don’t when push comes to shove.

The net result is that a seller will end up going for an auction process managed by a local accountant who is given a list of past interested buyers. Most potential buyers will check the progress on the new set of numbers and then pull out or low ball. The reason is obvious – the trust is gone, and the seller has become the “high mileage” talking point at the dance that everyone claims to have knowledge of, but no-one wants to introduce to their mum.