My firm represents the owners and managers of many outstanding companies in their sale processes. These clients attribute their noteworthy success to attributes such as: 1) a proprietary product performing better than the competition, 2) modern manufacturing facilities generating high-quality output at low costs, 3) targeted marketing initiatives attracting customers, 4) advanced research and development creating the next generation of offerings, 5) sophisticated internal software and systems enabling the business to run smoothly, 6) a deep, seasoned management team leading the business, etc. We highlight these impressive qualities in the confidential information memorandum (CIM) and other marketing materials.
While it is important to showcase our selling clients’ strengths to prospective buyers, it is critical not to overstate these fine companies’ attributes, to “gild the lily”. When this happens the seller loses credibility, causing buyers to question the veracity of everything in the CIM. Frequently occurring examples of needlessly overreaching claims that we see in others’ CIMs are:
- Claiming to be “the market leader” when in fact the seller only has a small, say 15 percent, share. “But we are terrific in our niches and gaining market share” is a common justification for such a bold assertion. However, falsely claiming such preeminence suggests that the seller is a) ignorant of real-world market dynamics or b) trying to hoodwink the buyers.
- Claiming to have “state-of-the-art manufacturing facilities” when parts of the factories are anything but. This inevitably comes out in the plant tours and makes the management team look like they a) don’t understand modern manufacturing technology or b) have deliberately misled the buyers about their capital equipment.
- Claiming to have “sophisticated research and development” when in fact the efforts here are relatively modest and have resulted in little innovation.
- Claiming to have “sophisticated systems and software” when it takes weeks to generate a simple month-end financial statement. The implication is that management does not understand what good systems are.
Even more serious than causing buyers to discount any specific claim, such exaggerated assertions undermine the seller’s credibility with buyers. As a result, even 100 percent true and verifiable representations affecting value will be sharply questioned. When this happens, otherwise impressed buyers will become more conservative in their pricing … if they bid at all. Even if they do proceed, buyers will draw out the due diligence process because “we cannot assume what the seller tells us is true.”
The upshot is that the seller should not surrender to temptation and “gild the lily” about the business’s established strengths. The seller’s resulting frankness will engender buyers’ trust, giving them the confidence to stretch on price. Furthermore, the seller’s “imperfections” can often be translated into “opportunities”. This is because buyers can be encouraged to conclude “if the seller performs this well with certain dated machinery and some holes in its management team, think what it could do if fortified by what we bring to the table.” Once this potential for synergistic added-value clicks in buyers’ heads, they will be significantly more interested and willing to pay higher prices than if the seller were “perfect” and they saw no way to enhance its performance. ●
Mark A. Filippell is managing director at Citizens Capital Markets
