When assembling a buyer list, it does not necessarily need to include immediate competitors. Sellers will know the reputation of these companies in the marketplace and may not want their legacy in such a company’s hands.
It is important to understand all of the objectives/considerations of the seller. Realizing the most money possible is an obvious goal but is it also to leave a legacy? ….to provide continuation and opportunity to the staff? ….to retain the brand? …the local employment base?
Acceptable acquisition structure and transaction timeframe are also important considerations in constructing a buyer list. Does the seller want to exit as soon as practical (usually a minimum of six months post close) or does he/she want to continue to lead the company as a division of a larger, perhaps public entity, and in this circumstance, he/she may be more comfortable with an earn-out or accepting shares of the purchaser as consideration (more on all of the potential structures later).
The buyer list is an evolving document
M&A advisors will use many resources to prepare a buyer list including proprietary in-house databases, existing relationships in industry and the private equity and fund sectors, business networks, associations, and commercial company databases, some containing as many as 15 million companies world-wide. These databases allow for searching by revenue/profit size, geography, key words, business description, NAICS codes (a government approach to classifying industries) and also by number of funding transaction and M&A transactions.
The buyer list is an evolving document. While an advisor has tremendous resources and many relationships at his/her disposal, they will never identify all potential buyers before engaging in the process. Once the teaser is in play, recipients (particularly private equity groups) will sometimes suggest other interested parties. Sometimes, private equity groups will have investments in companies (or relationships with companies) that are not obvious. These days companies can evolve from an idea to a funded and well strategically aligned early stage company in a matter of six months. Databases and M&A personnel have a hard time keeping up with this level of activity.
Entrepreneurs often exclude direct competitors from a buyer list for the obvious concern that the competitor will use the information that the seller is for sale a sales tool against them OR … they may wish to feign purchase interest only for reasons of gaining competitive intelligence. Excluding direct competitors may or may not be an issue from the perspective of realizing full value in the sale process. I have found that rarely does the obvious buyer turn out to be the actual buyer. Direct competitors may be under-capitalized or they may have very similar products where few synergies are realized post acquisition. For example, they may just want the customer base and then lay off staff and replace the solution. This may not be a desired outcome.
A buyer list should have the seller’s objectives at the core and include various acquisition rationale so that, at the end of the process, the seller has a number of well priced but differentiated options to choose from.