In this series of articles, we have analyzed whether selling a business is like selling real property, as many business owners have experience with real estate transactions.
In the previous installment of this series, What Drives Value When Selling a Business or Real Property?, we explored the major value-drivers of a privately held business as compared to real property investments. In this installment, we detail the major differences in the marketing materials and approach to attracting buyers for a commercial real estate property vs. an operating business.
Differences include the concern for confidentiality and the establishment of an asking price.
Issues in Marketing Real Estate
Confidentiality of the identity of the real property being offered for sale is normally not a concern as the value will not be diminished by the public knowing the asset is for sale. The marketing package for a commercial real estate property will include the location, description of the improvements, historical net cash flow, information on current tenants, any zoning or use restrictions, professional photos, surveys, and in most cases – the asking price. The property will normally be listed in the Commercial MLS. Additionally, many commercial transactions are marketed to a targeted prospective buyer list with a broad electronic distribution of an introductory marketing piece. Confidentiality is NOT typically a concern when marketing real estate.
Issues in Marketing an Operating Business
Maintaining confidentiality while marketing an operating business is of upmost concern. A breach of confidentiality can cause significant problems and impact the marketing of a business. Intentional or accidental breaches in confidentiality complicate the situation in many respects. For example, if employees find out their employer is selling the business to a new owner, they may become anxious about what the future will hold. They will hear stories about new owners making drastic changes in the business, downsizing, or other actions. While these changes are not what buyers will normally do, the uncertainty of a new owner may cause employees to look elsewhere for employment, causing a significant problem for the business owner, and possibly reduce the value of the business. Competitors can also use the information that a business is for sale against that business with both customers and suppliers. Keeping the fact that the business is being marketed confidential is critical to a successful process that generates maximum value for the business owner and buyer alike.
In order to maintain confidentially, a two-step process is used.
First, an “Executive Summary”, also known as a “Blind Profile” is prepared, which is a broad description of the business, industry, and summary financial information, but does not contain any information that will identify the specific business. This one or two-page document will be utilized in one of two possible approaches depending upon the size and unique characteristics of the business. In a Targeted Marketing approach, the anonymized document will be sent to a specific list of buyers identified by the broker. In a Broad Marketing approach, the anonymized document will be distributed onto various business selling websites, such as BizBuySell.com.
The second major differentiation between real property and an operating business is whether an asking price is included in the executive summary.
An asking price is usually not included when targeted marketing is used, as the recipients will typically have their own valuation methodology to arrive at a price based upon their financial or strategic interest. Not including an asking price removes a ceiling on the price of the first offers. In contrast, the inclusion of an asking price in a broadly marketed real estate listing has been shown to dramatically improve response rates.
Upon responding to the Executive Summary distribution via either method, prospective buyers will be required to sign a non-disclosure agreement (NDA) and present their financial qualifications to the seller’s representative for review. The sell-side advisor will interview the prospective buyer to discuss issues specific to the transaction and confirm that the buyer is both serious and financially qualified. Once the prospective buyer is screened and the NDA is fully executed, the sell-side advisor will share the Confidential Business Memorandum (CBM) which contains more detailed financial and operational information, as well as the name of the business.
One of the most critical pieces of the marketing plan consists of identifying the types of possible acquirers.
Prospective buyers will fall into two major categories: financial or strategic. For instance, High Net Worth (HNW) individuals are financial buyers who are usually motivated by return on investment and building wealth. Strategic buyers will usually be an existing company that is motivated by improving the value of both their business and the target business through operational or other synergies. This is colloquially referred to as “two plus two equals five.” A third category of buyer, the “hybrid”, might be a private equity group or family office with a current portfolio investment in a business that is strategic to the business being marketed, or a goal for strategic expansion into the selling business’ space, resulting in both financial and strategic interests.
The objective is to get the best overall price and terms in a sale transaction. While, in theory, a strategic buyer should pay the highest price, other terms may not be acceptable. A financial buyer may pay a competitive price but may have flexibility to provide other desirable terms such as a partial ownership in the business through a recapitalization transaction.
The sales process established by a Sell-Side Advisor is designed to foster competition among multiple buyers, encourage timely performance and solicit the best price and terms.
The marketing phase is the first step in the process and is often the most time-consuming and complex. Shepherding this detailed process through its multiple stages without disruption to the core business, while enabling the business owner to continue to run the business, is a key aspect of the value provided by a Sell-Side Advisor.
While this article details the differences in marketing a commercial real estate property vs. an operating business, there may be other issues that should be considered for each particular asset, whether it is a business or a real property investment. Seeking the advice of a professional that is experienced in marketing and selling businesses or real property will definitely lead to a better final outcome for the owner when they have decided to exit the business or sell the property.
The next article will cover the comparison of negotiations in selling real estate with negotiations in selling a business. Please reach out if you have a question or topic you’d like to see covered in future articles.