Tag Archives: acquisition

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.

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.