What’s Different About Pursuing a Low Value Acquisition?

What’s Different About Pursuing a Low Value Acquisition?

If you’re an entrepreneur, the odds that your company will be acquired at a low price, just to prevent bankruptcy, are far higher than the chances that it will sell at a high price, and make you rich. That’s just the story of entrepreneurship.

Unfortunately, it’s easier to learn how to handle a high value acquisition situation. It’s a lot more interesting for observers to write about how to sell a company to Google for $100 million than to sell to a small company for $700,000 in a fire sale. Moreover, few investors and founders want the world to know of their efforts to recoup ten cents on the dollar.

While much about selling a company is the same whether the acquisition would be seen as a success or a failure, there are five important differences:

Maximizing Value is Harder with a Low Value Acquisition. Getting a high price for selling a company is easier the more alternatives you have. When you are doing a low value exit, you will have fewer options. If you are running out of money, you will not be able to turn down low ball offers and continue to run your company, as you would if you were considering a high value acquisition. You also can’t easily turn to the alternative of raising more money because your company probably is not fundable. Finally, there are far fewer people interested in turnaround situations than in just riding an upward wave. All of this means that you have to work much harder to get competing offers so that you can create an auction for your business.

Comparing Offers is More Difficult with a Low Value Acquisition. When you are selling at a high price, you tend to get well funded buyers offering cash or public company stock. Potential buyers are unlikely to be underfunded start-ups or businesses looking for a sweet deal. Those types of acquirers know they will not be chosen when there are better alternatives. For a low value exit, however, you might be comparing an acquisition by start-up offering a stock swap to a business seeking to pay a fire-sale price with a two-year earn out. Such deals are tougher to compare than cash deals.

It’s More Difficult to Tell the Story of Why. To sell a company, you need to explain why the company is worth more to the acquirer than that company would pay for it. When a company is selling for a high price, that story is usually about strategic fit with the acquirer or how the buyer’s resources can be leveraged for growth. But for a low value acquisition, the logical story is that someone else would do a better job building the business than you. That’s tough to say.

You will be Dealing with Unhappy Investors. Getting agreement from your investors to sell a company for 10 times what they invested in it is far easier than for one-tenth of what they put in. Rational investors know that maximizing the value of a company is the same whether the marginal dollar is increasing a profit or cutting a loss, but investors rarely think rationally about money. Instead of focusing on getting the best possible outcome, many investors would rather criticize founders for their past mistakes. For low value acquisitions founders need to manage disgruntled investors.

It’s Probably Not Worth Your Time to Negotiate for More. Think about it this way. If you raise money for a business at a $1 million valuation and you have an offer to sell it for 10 times your money, negotiating for a 10 percent higher price makes sense. That gets you an additional $1 million for your time. But if you have an offer to sell the business for $100,000, a 10 percent higher price only yields an extra $10,000.

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Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.