Chapter 6

Let’s turn now to the much more intriguing question and the subject of this book:  Is your ordinary company one that could sell at a price more than two times what the average financial buyer would pay?  Or in other words, can your company sell for an Outrageous Price? Again, before you dismiss the possibility, I ask you to consider what value your company might have to a buyer who would experience tremendous gain or relief from pain by acquiring it.

Before you answer, let me offer a metaphor for the very real “intangibles” present in the Outrageous Price Process.

If I were to unearth from my musty basement, a small, forgotten painting passed down through generations of my family, I might estimate its “garage sale” value based on the size of the canvas, and appeal of the subject matter.  If I notice that the painter’s name is Vincent van Gogh, I quickly call an expert, whose estimate of value includes far more factors than the physical characteristics of the painting.  While that expert knows what value the market has historically paid for this painter, she also considers the value to the collector who has spent a lifetime searching for this painting or to the two museums vying for the title of “Largest van Gogh Collection.”

Estimating a sale price of a “priceless” piece of art to a collector who needs to possess it is much like estimating an Outrageous Price for an ordinary company.  Not only do we look at the “physical characteristics” of the company, but also at what it offers to the buyer who needs it.

Typical estimates of sale price include not only an analysis of a company’s financial statements, but also assumptions about the future performance of the company, the health of the M&A market, and the cost of credit.  While this information is important, it does not, however, indicate how much a company might be worth to a buyer who understands its future potential or who could capitalize on synergies between the two.  Similarly, standard estimates of sale price don’t even begin to predict what your company might we worth to a buyer who would experience tremendous gain or relief from pain by acquiring it.
The Proactive Sale Strategy that I described in the first part of this book and the carefully orchestrated Outrageous Price Process that I describe in Part II go far beyond the typical estimate of sale price.  While the Proactive Sale Strategy can be used alone to maximize sale price and minimize a seller’s risk of failing to close, it can also be used to assess whether a company has the potential to sell for an Outrageous Price.  The purpose of the Outrageous Price Process is to extract that Outrageous Price from a buyer.
           
CAN YOUR COMPANY FETCH AN OUTRAGEOUS PRICE?
Financial buyers use financial formulas to determine the price they will pay for a company.  In its most rudimentary form, these buyers establish the minimal rate of return that they require and work backwards to a purchase price.  An Outrageous Price is one that is at least two times the prevailing average industry multiple of EBITDA (earnings before interest, taxes, depreciation and amortization).  I assume that you are aware (or as aware as you can be) of the multiples for your industry.  Imagine, for a moment, being paid twice what those multiples would suggest.

To help determine if your company is a candidate to fetch an Outrageous Price from a strategic buyer (one who does not use a simple formula, but instead pays based on its perception of future value), we will look at the analysis and process that enabled some not-very-remarkable companies to do so.
I do not intend any disrespect in characterizing these companies as less-than remarkable.  Each was run by an owner driven to achieve excellence, but it is not necessary for your company to be extraordinary to sell for an Outrageous Price.  As you’ll see in Pillar I, it simply must have a competitive advantage that it can leverage.

We will describe in detail the four components (or pillars) that support the Outrageous Price.  As you read the short introduction to each, keep in mind that all four must be present for your company to have a chance at grabbing the brass ring (an Outrageous Price).  The absence of any one extinguishes the prospect of selling for an Outrageous Price, but does not mean that the company cannot sell for a premium price. 

Pillar I:  Competitive Advantage
In the Proactive Sale Strategy, we spend time identifying the company’s competitive advantage.  If a company does not have a competitive advantage, we cannot initiate an Outrageous Price Process.  If a company has a competitive advantage, we can investigate the possibility of engaging in the Outrageous Price Process.  Our first question is: Can the competitive advantage be leveraged to entice a buyer to pay an Outrageous Price? Can we use that competitive advantage to show a buyer how acquiring the company would spare the buyer a great deal of pain or yield tremendous gain?  These are the key issues as we seek to sell a company for an outrageous price.

In Chapter Four, we discussed the Hover and Dive process that we use to determine why a customer chooses one company over its competitors.

In the Outrageous Price Process, competitive advantage is the foundation for: determining how the selling company either causes a potential buyer pain, or how that company offers a potential buyer considerable gain.  Once we make that determination we work create a strategy to persuade that buyer to pay a price commensurate with the amount of relief or gain it achieves through the acquisition.  The price we are seeking is the Outrageous Price (two times the average price prevailing in the marketplace.)

Pillar II:  Buyers in the Marketplace
In Chapter Five, we talked at length about buyers, but our focus now is on the second Pillar of the Outrageous Price Process:  buyers who pay Outrageous Prices.  Who are they?  What do they look for in an acquisition?   How do they behave?

In Chapter eight we will look at the characteristics of the Outrageous Buyer and then at the reasons they can be persuaded to pay Outrageous Prices.  For a seller to get an Outrageous Price, there only need be one buyer at the table.  We’ll talk about how to locate the buyer that will pay handsomely to make the acquisition necessary to relive it from the pain it currently experiences or to reap tremendous gain.

This idea of pain relief or gain is incredibly important to our analysis and to your ability to get an Outrageous Price for your company.  Specifically, we ask:

• Does your company provide the buyer, through its competitive advantage, a means to achieve outrageous gain? To realize gain a buyer might need: propriety technology, the right geographic location, particular expertise, a highly successful marketing program, an ace sales organization, or access to a specific marketplace.
• Is there a buyer in the marketplace that would prefer to acquire your company (because of the pain it is causing) rather than compete with it? We’ll spend an entire Chapter seven discusses how to leverage a competitive advantage in a way that helps a buyer conclude that acquisition is a far, far better thing than competition.

Pillar III:  You, the Seller
In Chapter 9, we will talk about you—the seller.  We will determine if you’ve got what it takes to demand and get an Outrageous Price for your company.  As buyers contend (using Buyer Speak) that they do not need to purchase your company, you as a seller must maintain—and mean—that you do not need to sell your company.  Buyers will engage in a carefully orchestrated process to undermine your confidence in your sale plan.  We’ll look at the strategies buyers use and how sellers must behave if they are to succeed in getting the Outrageous Price.

Pillar IV:  Advisors
In Chapter 10, we will look at the type of transaction advisor you need to help you through the process I’ve developed sell your company for an Outrageous Price. We’ll look at exactly what characteristics they need to possess to orchestrate an Outrageous Sale.

ARE THE PILLARS IN PLACE?
If your company has the “right stuff,” you’ve got some decisions to make.  Can you leverage your company’s strengths to relieve pain or create tremendous gain for a buyer?  Are you the type of person who can stay the course?  Can you find experienced advisors to steer the transaction to an outrageous closing?  To go for the outrageous price you need patience and an ability to perform under pressure.  Your advisor needs all that and experience, creativity, good instincts, and serious negotiating skills.  The two of you must trust each other completely.  If you’ve got what it takes, I believe, as do the owners I’ve represented, that the rewards are worth every bit of the hard work.
If, however, you suspect that, because one of the four pillars of an outrageous sale is missing, your company is not a candidate for an Outrageous Price, do not despair.  You join approximately 90 percent of owners who want—and receive—top dollar for their companies.  In Chapter Ten, I’ll describe the technique—the competitive auction—that we use to achieve that goal.  We’ll talk about how the competitive auction works, what role you play in it and how to avoid its major pitfalls.