David Young is a Partner at DLA Piper (http://www.dlapiper.com/). In this video he talks about how to negotiate the best price when selling your business.
- Valuation of a public company is based off stock price
- Valuation of a public company is based on multiple factors
- Investment bankers are the best way to find buyers
- Using a VC valuation can help leverage selling price
So when you’re looking to sell a private company, it’s very challenging to sort of create a competitive situation or able to negotiate the best price. With a public company, the price is trading, the stock is trading in NASDAQ at a certain price.
And what you’re going to get in some of the companies is some premium to that. Whether it’s 10%, whether it’s 40%, but there’s a sort of very clear starting point in the value of the company.
With the private company, the purchase price you’re going to get is much more wide open. Some companies are more established have the certain level of (Inaudible) maybe it’s a multiple of that. But, other companies earlier stage companies it is very speculative that value might be the technology, might be agreements or exclusively arrangements.
And so it’s challenging to work through that obviously ideally, you get multiple bidders at the same time. And investment bankers are sort of the best way to sort of manage the process talk to likely buyers, line up multiple bidders.
It’s challenging as a private company even with investment bankers in an industry where there’s very clear set of 10, 15, 20 acquirers to go knock on doors. It’s still difficult to get those multiple offers to align. Although ideally, being able to do that get into play of each other is the best.
Another very common and almost better way that private companies are able to negotiate the price is using a potential venture capital or other equity financing as the rationale or as sort of the competitive situation to the buyer. Because if a company is a going to raise money from venture capital investors at a $20,000,000 valuation after the deal as an example, the acquirer knows that the second that deal closes, those new investors are really in it to make at least 3 or 5X of their money.
So $20,000,000 suddenly, the second that deal closes the purchase price for your company becomes a minimum of 60 that you can accept and the buyers believe that and know it to be true and so if they are offering 25,000,000 the time is absolutely now.
So that’s the way to get them to move and act quickly. Really with any negotiation when you’re negotiating the side of your company, it all comes down to what’s your best available alternative.
And if you can have a credible alternative whether it’s another buyer, whether it’s doing a financing, whether it’s just a standalone we don’t really need you. We can run this business and go out really big. So you need to take us off the table.
But as of any negotiation, having your best available alternative really dictates your negotiating strength.