Category Archives: Finding the Right Buyer

Finding a Buyer: It is Rarely the One You Expect

When presenting your M&A advisory credentials to a prospective client, the part that typically has the most impact is illustrating that, either you already have a relationship with the perfect buyer, or that you can readily access the perfect buyer (i.e. you have done deals in the space which implies that you are familiar with the dynamics of the industry and the buyers in the space).  M&A shops also taut the fact that they have databases of many (for example, more than 5,000) active buyers.  My experience is that the highly anticipated buyer is rarely the actual buyer.

One reason for this is that the private M&A market is a highly illiquid market.  What does this mean?  It means that when you decide to sell your business, you initiate a process, and that process will approach many qualified buyers during a fairly short timeframe.  During this timeframe the highly anticipated buyer may:

  • be engaged in other acquisitions
  • be engaged in a financing
  • be engaged in a strategic review where acquisitions are put on hold
  • be on an extended business trip/holiday
  • not be interested or able to acquire
  • be engaged in being acquired themselves; or maybe
  • your business is no longer a strategic priority for them

There are many reasons why the highly anticipated buyer may not be interested or able to pursue an acquisition when you approach them.  Once you have started the process you can’t wait for the company that you thought would be your buyer to be ready.  You have to make the best of the universe you are addressing to bring to the table a number of capable and interested purchasers.

The other reason why the highly anticipated buyer is rarely the actual buyer is that it is sometimes impossible to predict the rationale for a buyer’s interest.  One type of buyer that can be a very good buyer is called a “platform buyer”.  A platform buyer will be interested in the business for one of three reasons, its customers, its personnel, or its technology.  As an example, we were engaged to sell a pattern recognition company in the field of product quality control.  This technology would scan a production line and “kick-out” products that did not meet certain criteria.  In this case, the ultimate buyer was the US defense department, who paid a strong premium and who then used the technology for facial recognition for national security purposes.  Who would have predicted that? … but having approached large technology companies that also served defense contractors ultimately led to this outcome.

Getting back to my first point…having done deals in the space or knowing more than 5,000 active buyers is of course a plus but other factors that are important (in choosing your advisor – more on this later) are getting the right team on the file, making sure they have the time to spend on it and that it is a priority for them.  What foremost an M&A advisor needs to do in any and all cases is run a thorough and diligent process.  As I have noted before, you might start by sending 200 teasers, then 20 CIMs, get 5 EOIs, have 3 management presentations and then go exclusive with one.  This experience is not unlike any other sales or business development funnel and as anyone in these fields knows, success comes from a thorough, diligent and tenacious approach.

Is There More Than One Buyer For My Business?

I have come across several niche businesses lately where they have received unsolicited interests from potential buyers and this leaves the owners wondering, are there any other buyers for my business?  Should I bother with hiring an agent and engaging in a process that could take many months to complete or take the bird in the hand?

If these companies were publicly traded there would be no question.  The board of directors of a public company would undoubtedly reject the first unsolicited offer and engage an investment bank to explore alternatives.  Assuming normal operating circumstances, a board would not fulfill its fiduciary duty if it accepted the first bid.  Due process would require at least an independent fairness opinion, but even this would not assure the shareholders that they will realize the highest share price in a transaction; only a thorough and diligent auction process can do that.

Back to the question at hand; could there be other buyers?  When a potential seller operates in a very specialised vertical with only several competitors – that may spread unfounded rumours of the company’s demise as soon as they hear of a possible transaction – it is tempting to go with the bird in the hand.  But, as I have noted several times, the best buyer is not likely to be a direct competitor.

The best buyer is likely to be a “platform buyer”.  A platform buyer will be interested in the business for one of three reasons, its customers, its personnel, or its technology.  As an example, we were engaged to sell a pattern recognition technology company in the field of product quality control.  This technology would scan a production line and “kick-out” products that did not meet certain criteria.  In this case, the ultimate buyer was the US defence department, who paid a strong premium for the business and then used the technology for facial recognition for national security purposes.  Who would have predicted that? … but having approached large technology companies that also served defence contractors ultimately led to this outcome.

The point is, even if you feel that there are only one or two competitors that could potentially be interested in acquiring your company, we can likely find additional buyers that you have never thought of as per the example above.  It is extremely rare that we have not been able to source at least several expressions of interest for a company for sale.  In the end you only need two interested parties to create that competitive tension.

So what is a company to do?  Private companies, where owner-entrepreneurs own majority control can do as they please.  This is the luxury of owning a private company.  Company owners may not want the hassle of preparing a business for sale or they may feel the value being discussed is fair but, in the end, going to market with an experienced advisor is the only way to secure the best price for your company.

I Have a Buyer For Your Business

My previous post was about niche businesses and those owner-entrepreneurs wondering if there could be more than one buyer for their business.  There are other sectors that include many competitors.  Just within the IT sector I am thinking of Cisco resellers, Microsoft SharePoint or Dynamics shops, IT solutions companies focused on virtualization and cloud strategies.

Some M&A advisors will approach companies in these sectors and say “I have several buyers for your business.  In fact I know the CEO of ABC Co. and the CEO of XYZ Co., they are good friends of mine and they are keen to buy your business”.  Some business brokers will say they have 100’s of buyers ready to go BUT the likelihood that these are really strategic and actually able to acquire is very small.

So, how do you separate fact from fiction and secondly, how important are buyer relationships?

Recently closed transactions in the space and client references from those deals are verifiable evidence of capability and up-to-date market knowledge.

However, they should not be the only factor in choosing an investment banker to advise in the sale of a business.  Having done deals in a sector renders the mandate more efficient for the advisor by: (i) knowing up-to-date acquisition terms and pricing and (ii) the appetite and ability of potential buyers, but securing a number of desirable offers is ultimately what the seller is looking for.  To achieve that you need an advisor who will work tirelessly on your behalf, not just forward the first offer received and pressure the seller to take it.  You need a company champion who will spend the time, leave no stone unturned and who will fight for your best interest.  Having done deals in the sector may lead to short-cutting the process believing that certain companies are active buyers and others are not buyers at all. Such assumptions will limit the potential that could otherwise be achieved.

As I have noted several times, the best buyer is not likely to be a direct competitor (who could not pay a strong price if they were just interested in acquiring the customer base) but a “platform buyer”.  A platform buyer will be interested in the business for one of three reasons, its customers, its personnel, or its technology. Platform buyers are good buyers because they typically leave the existing assets in tact (brands, people) and usually bring a growth opportunity that allows them to pay a good price and provides the company sold with new opportunities.

So should buyer relationships drive your choice in investment bankers?  An advisor knowing a CEO who wants to buy your business (even if for argument’s sake that company is Cisco or Oracle – pick any leader in its space) does not guarantee a good price or even a good offer.  Only by going to market with an experienced advisor who (i) understands the business and has presented the opportunity strategically, (ii) conducts a thorough process and, (iii) has the time and interest to put your company first, can you secure the best price for your company.

Buyers are Currently Paying High Prices for Businesses Like Yours

My previous post was about M&A advisors saying they personally know buyers in a sector.  Another tactic that gets potential sellers’ attention is to say buyers are currently paying high prices in a particular sector.  For example, after Facebook offered $1 billion for Instagram, advisors might approach other photo sharing application companies and say, because Facebook offered $1 billion, there will be other buyers also interested in paying a high price for your company.

When presenting their credentials, M&A advisors will often include market stats such as recent publicly available acquisition terms of similar businesses and a sample of comparable publicly traded valuation multiples (comp tables) to provide a potential seller with a basis for value expectations and engage the potential seller in a value discussion.

While recent transactions and comp tables can be helpful to show broad trends, interpreting them to determine expected sale price is fraught with pitfalls.  When comparing your company to recent sale transactions you need to examine many possible differences in company risk and future prospects.  The following are just some of the questions that should be considered: is the company in question of the same size, does it have more or less customers, does it have patents, a defensible product/service differentiator, are the margins the same, historical growth rate, is there debt or redundant assets, was the debt included in the sale, etc.  In the case of publicly traded company valuation multiples, it must be recognized that these represent shares trading at a minority discount (a minority discount applies because, as a single shareholder of a public company, you have little influence over its corporate decisions), control blocks typically sell for 30% to 50% more.  There is an old statistics joke that goes as follows:  “he uses statistics like a drunken man uses a light post, for support rather than illumination.”  Recent transactions and comp tables can be used in the same way.

Keeping in mind that recent/current market activity can only be a rough guideline and that no one can predict what the results of a well managed auction between two or more motivated strategic acquirers will be, it is nevertheless imperative that the seller and the M&A advisor agree on the expected sale price range before the divestiture process begins.  The best way to align the seller’s and advisor’s interests is to agree that the bulk of the advisor’s compensation be tied to achieving the mutually agreed sale price range (having said that, I also think it is fair that the advisor receive some level of work fees in order for him/her to get comfort that the seller is taking the process seriously – however this work fee should be credited towards the success fee).

To put it kindly, M&A advisors will put their best foot forward in their presentations to convince sellers to use their services and, as usual, it is a case of buyer beware.  Don’t believe all that you hear and see and look beyond the pitch to the firm’s history, reputation and particularly the lead banker’s character.  At the risk of sounding like a broken record, only by going to market with an experienced advisor who (i) understands the business and has presented the opportunity strategically, (ii) conducts a thorough process and, (iii) has the time and interest to put your company first, can you secure the best price for your company.

When is an MBO a Good Idea?

MBO stands for Management Buy-Out and describes one alternative for an owner-entrepreneur to exit his or her business.  Management can range from an experienced arm’s length team to family members who are active in the business.

The advantages of an MBO include:

  • Low Transition Risk

The buying managers know how to run the business.  Management continuity is usually a big issue in the sale of a business and keeping management in place adds tremendously to the finance-ability of the transaction.

  • Minimum Disruption

Putting a business up for sale creates a period of uncertainty that direct competitors can capitalize on.  While this threat is often overestimated, this rational will influence certain entrepreneurs to choose this path.

The drawbacks of an MBO include:

  • Suboptimal Price

An auction process among strategic buyers that have the most to gain from the acquisition will most often realize the highest price.  One cannot predict what price a strategic buyer might pay. See: “What Will a Strategic Buyer Pay?”.

In some cases management and the seller negotiate a fair and do-able price and in other cases an independent valuation is performed but in either case it is not likely to be equal to what a strategic buyer might pay.

  • Suboptimal Structure

Unless there has been a plan in place for years, buying managers typically don’t have sufficient cash on hand to buy the business.  As a result, in most MBOs you will see vendor notes where the seller finances part of the purchase price for the buyer.

However, there is one big exception to the drawbacks and that is if the management team can attract the attention of a financial buyer.  I noted in “What Will a Financial Buyer Pay?”, that a financial buyer will pay like a strategic buyer when it is considering portfolio add-ons.  A strong management team that aligns itself with private equity that has other investments in the space can be a very strong buyer.  Now the question becomes: does the management team want to partner with an institutional investor and pay that much?

The decision to sell to management is one that should be addressed early and definitively.  Management should not be included in the auction process.  This creates a conflict of interest where management is incented to act in its self interest.  There are also expectations to manage.  If management is keen to buy the business but cannot come to terms with the seller, or cannot secure the financing, then they may be seriously demotivated and not work in the best interest of the auction process.

An MBO can be a good option if the buying management team is strong and is interested in partnering with an institutional backer that can bring cash to the transaction.  If the MBO is pursued simply because other options are not of interest then the seller must be satisfied with potentially accepting a lower value proposition.