Is Greed Good When Selling a Business?
Waypoint Private Capital
Mergers & Acquisitions | Sell Company l Buy Company l Capital Sourcing l Business Valuations
Rationale for maximizing value to positively impact the lives of others.
Many of you might remember the movie “Wall Street” in which the lead character, Gordon Gekko, espoused “Greed is Good.” The pertinent portion of his speech given to the shareholders of fictitious Teldar Paper is worth another read.
"The point is, ladies and gentleman, that greed – for lack of a better word – is good. Greed is right.
Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms – greed for life, for money, for love, knowledge – has marked the upward surge of mankind. And greed – you mark my words – will not only save Teldar Paper, but that other malfunctioning corporation called the USA.”
That was a powerful speech that helped him win control of Teldar Paper. Gordon Gekko personified greed and everything that was wrong with certain people who came to fame (and later went to jail) during the 1980’s LBO boom.
But what if we change the phrase “Greed IS Good” to “Greed FOR Good"?
In this article, we explore the rationale for business owners doing everything they can to maximize value when they sell their companies so they can use the “extra” money to positively impact the lives of others. All too often, business owners leave significant money on the table when exiting their companies. They receive an unsolicited offer from a buyer. They think the offer is “fair” or is “good enough” to support their retirement and the lifestyle they want after the sale.
They don’t want to jeopardize that offer and aren't particularly motivated to take the necessary steps to maximize the sale price, so they accept it and sell to the only buyer who expressed real interest in their company. But this short-term thinking represents a missed opportunity – one with potential positive effects that extend far beyond the owner's own wallet.
Rationally Greedy
Might we suggest another option when selling your business. When selling a business, the business owner should be rationally greedy. If they don’t need the extra money they could get by trying to maximize the sale price, they should be greedy for the sake of others. And in reality, they aren’t being greedy, but are just being smart and taking the necessary steps to ensure they maximize the value of their business when selling it. By taking the necessary steps to ensure that they harvest all of the value they created in the business, the "excess" value can become a powerful tool for positive impact.
It's easy to imagine the possibilities by grouping them into two buckets:
Whatever the cause, maximizing value and controlling the use of that excess value seems to be a worthwhile pursuit.
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Harvesting Full Value When Selling Your Company
There are two things a business owner can do to ensure they are maximizing the value of their business when they sell it:
Exit planning involves preparing for the sale of the business in the years leading up to the sale. This preparation, as we explore in more detail in other articles (Proven Strategies to Increase the Value of a Business) and (Private Equity Secrets to Value Creation), is often focused on increasing the valuation of the business in the years leading up to the sale. It may focus on increasing revenue, building a stronger management team, reducing customer concentration, and increasing margins through strategic capital expenditures. Exit planning focuses on increasing the value and salability of the company.
Another way a business owner can maximize the value of their business when selling it is to work with an investment banker to help sell the company. Most business owners have never sold a company before and shouldn’t attempt to learn how to do it in what is likely the biggest transaction of their life. Instead, they should hire an investment banker to guide them through the sale process.
An experienced investment banker will have worked on hundreds of sell-side M&A transactions and can guide business owners through every step of the process and help to maximize the valuation received. While the sell-side M&A process is explained in great detail in this video (Sell My Business: Go To Market and Auction Process) and others on our website, the process can be summarized as follows:
Buyers in non-competitive situations rarely offer maximum value for the target business. They relish the fact that they are in a non-competitive situation precisely because they don’t have to make a strong offer for a company. Contrast that with a sell-side process being managed by an investment banker that creates competitive tension amongst the many buyers vying for the acquisition and drives premium valuations. Research published in the Quarterly Journal of Finance has found that sellers using an investment banker achieve valuations that are 25% higher than those choosing to sell on their own. We often achieve results much better than that.
Can greed be good? We would argue the answer is a resounding “Yes!”
Business owners who take the necessary steps to maximize the value of their business can harvest the “excess” valuation and use it for good. The excess value created by being rationally greedy can have a positive impact on many people and communities. Good enough isn’t enough when greed can be used for good.
"Greed – for lack of a better word – is good. Greed is right. Greed works" (for good).