Ready to Sell - Part III: Finding the Right Buyer

Our 5-part series Ready to Sell is designed to help start the conversation around things every business owner should be thinking about before they start the sale process.

Part III:  Finding the Right Buyer

It sounds deceptively simple – the right buyer is the one who will pay the highest price – right?  Unquestionably price is key.  The price needs to be right for both the seller and the buyer for a deal to make sense.  But price is not the only factor business owners should be weighing when considering a sale.

In this article, we’ll help frame three key questions every business owner should ask themselves as they get ready to sell – to help you think about who is the right buyer for your business.

1).  What are your priorities for the business – now and after the sale?

Think about what matters to you as a business owner – assuming the price is acceptable, what do you need to see to agree to sell?  Every business owner should make their own list – and rank the priorities.  If there are multiple shareholders / owners, start this conversation now, well before heading down the transaction path to avoid surprises, acrimony and gnashing of teeth.  Here are some starters:

• How involved do you want to be in operating the business after the sale?

• How do you see the legacy of the business today and after a transaction?

• What do you see as the future of the brand, the business identity?

• What is the culture of the business, and how important is it to your brand identity?

• What are your objectives for your team post-transaction:  will there be roles for your key employees?  Longtime employees? 

• What are the business’ ties to the community?  How important is it to maintain those ties?  How will a transaction impact this?

• How deeply will the business be integrated with the buyer’s operations?

• Do you want to retain an investment – large or small – in the business after the sale?

• Are you looking for a financial partner to help the business grow through acquisitions?

• Are there companies – competitors or otherwise – that you won’t entertain as possible buyers?

Fully working through questions like these will help you think about what’s important to you – besides the sale price – and start the conversation around the second question:

2).  What type of buyer is most likely to align with your priorities?

At the highest level, we’re talking about Strategic buyer vs. Financial buyer, perhaps both, or possibly a “Hybrid” buyer (a Financial buyer that already owns a business in or near your market).  A good place to start is to do some self-evaluation:  what type of buyer is your business is likely to attract?  Do you have products/services, markets or customers that would complement a competitor’s operations?  Are there larger competitors in your market that have the means and interest to acquire you?  Are you small enough for a competitor to “digest”?  Does your business have the financial characteristics that Financial buyers look for?  Have Financial buyers been active in your market?  Are you large enough to be meaningful as a standalone acquisition for a Financial buyer? 

There are literally dozens of other considerations, but the point is, think about whom you want to engage – and whether your business fits their priorities strategically, operationally, financially, and equally importantly, vice versa.  From here, it’s time to start making your list and checking it twice.

3).  Which buyers would you target in a sale process?

Once you’ve thought about what type of buyer you’d prefer to engage with, you can start to build your “guest list” – the companies that you would proactively engage with when it is time to go to market.  Every business owner should build and maintain this list so that you don’t include parties you’re sensitive about, but also don’t overlook interesting and interested parties who may be less obvious as potential buyers. 

We see many business owners make the mistake of waiting to do this exercise until just before launching a sale process.  Your “guest list” should be a living, breathing entity – review it regularly, keep it updated, amend when circumstances demand.  This will help you think about your approach if you’re approached – if someone on your “guest list” reaches out to you proactively and/or unexpectedly, do you want to engage with them?  What would it take for you to engage?  And similarly for someone not on the “guest list”.  Why wouldn’t you consider them?  What would need to change for them to make your list?

For potential Strategic buyers, this means thinking about your direct competitors, where sharing sensitive information on your business may be tricky.  How would you manage information sharing?  Are there competitors where it’s just too risky to engage?  It means thinking about groups of potential buyers outside your list of key competitors and giving consideration to large / diversified companies, partners, vendors, maybe even customers.  What would be their rationale for acquiring your business?  How strong is the investment case?

A Strategic buyer may be well-positioned to capture revenue and cost synergies, but they also may need to secure external financing, adding time and complexity.  They may have multiple stakeholders involved in decision making, from business unit leaders to corporate development organizations to transaction committees, senior management and in some cases, the board and/or shareholders.  There may be regulatory issues to consider.  In some cases, Strategic buyers can be slow-moving at times...more “deliberate”.  Which is why it’s critical to think about not only Strategics’ ability to pay but also their alignment with your priorities and your alignment with theirs. 

Financial buyers can often move very quickly and decisively, even if external financing is needed.  They are entirely focused on executing deals, so they can be very efficient in managing due diligence.  They know their own deal-breakers and don’t often waste a lot of time when one arises.  While historically Financial buyers were somewhat synonymous with Private Equity and known for aggressive cost cutting to generate returns, that’s less true today – Financial buyers are more diverse than ever.  There are over 4,000 active private equity firms in the US, not to mention family offices, independent deal sponsors, and other financial acquirors.  So whatever your priorities, it’s more likely now than ever before that you can find multiple Financial buyers that align with your priorities.  Not all rely heavily on leverage or layoffs to generate their returns. 

But it’s important to understand that many Financial buyers are laser-focused on protecting their investment, especially when it’s someone else’s money (as is often the case).  For many sellers, this manifests in deal structure and post-transaction obligations.  There may be a significant earnout component, equity rollover or seller note.  You may be asked to continue on in an operating or advisory capacity for an extended period of time.  All of which elongate the timeline for you as a seller to fully exit financially or professionally.  For some business owners, this is exactly what they want – de-risk their ownership while maintaining some portion of the future opportunity.  For others it can be surprising to actually see when and how (and if) the price will get paid and how long they will be expected to remain in their seat.

With either group, Strategic or Financial, we recommend you keep tabs on who is active as an acquiror in your market – keep that “guest list” current.  Who’s been showing interest, who has the resources to complete an acquisition, who seems to be focused on building or bolstering their market position?  And for Strategics, even if they are not active, why should they be?  What’s the reason they should be considering buying your company? 

Bonus Tracks:

1.       Never trust the NDA (or “Be careful with Competitors”).

The M&A process requires that the parties share sensitive information to help them make informed decisions about transactions – and most M&A transactions will include some form of an NDA between the parties as a result.  But the NDA is not a shield, it’s a mop.  The NDA only sets the terms of what happens if sensitive information is revealed or misused – it does not prevent information from getting out.  If you’re concerned about sharing customer or pipeline data, future product or market plans, anything competitively sensitive – don’t rely on the NDA, limit what you share.  There are many ways to do this – anonymize data, limit how and to whom info is provided, share later in the process when there are some commitments in place.  You have to have some trust when speaking with potential buyers, but you should still exercise some caution.

2.       Know your buyer.

Not every M&A deal gets across the finish line.  There are widely varying estimates of how often transactions fail to close but there’s no debating that when a deal falls apart, it can be incredibly disruptive to the business.  You can reduce the risk of a busted deal by making sure you know your buyer well – at least well enough to make sure they’re serious, they’re capable of closing the deal, and they follow through (generally).  Before you dig in for the due diligence process, dig in on some buyer intel.  Do they have a track record of undertaking M&A deals?  Do they have the funds available to meet your price?  Do they have a history of broken deals?  To be fair, every situation is different, and buyers do walk away when the deal isn’t right for them too.  But make sure they aren’t serial tire-kickers before you get too far down the path with someone who isn’t serious about closing a deal. 

Share your thoughts, feedback and tips in the comments or get in touch to start your preparation process at info@amplify-cs.com.

In this series “Ready to Sell” we’ve explored the financials in Part I, and the Deal Team in Part II.  Next up, we’ll talk about the deal timeline.