Whether you are running an auction, sending out proprietary deals, or something in between, building an effective buyer list takes skill and ingenuity. You need to incorporate the intangible nature of personalities and interests with the reality of EBITDA ranges and market conditions.
However, it is not only this combination of art and science that yields an effective buyer list. It is also crucial to combine different types of buyers with various interests and strategies to maximize the effectiveness of your list.
According to Axial Member Walter Bailey, Managing Director of Academy Securities, “Diversity is critical to building a successful buyer list. Drawing from years of experience, a broad sampling of buyers tends to create a better value outcome for your client.” Bailey explained how a homogenous buyer list can risk leaving your client dissatisfied with the process and can result in a suboptimal transaction value.
Ensures Client Satisfaction
For most intermediaries, a successful deal is one that leaves the client satisfied with the process. However, the definition of satisfied varies from seller to seller. “While money is often a primary driver,” says Bailey, “I have had experiences where valuation is not the only — and sometimes not even the primary — consideration.”
To ensure client satisfaction, Bailey begins all processes with a diverse pool of buyers. This diversity ensures that the seller fully understands the available options. He explained, “I will do preliminary independent research on companies and/or markets that may be relevant. Before showing the list to the client, we will intentionally incorporate some outliers to help the client consider some less obvious alternatives. We like to present the client with new ideas and new perspectives.”
With some possible investors, Bailey explained, “I’ll approach the seller with this list — usually of 20-30 prospective ideas — and explain the benefits of each. Some may have strategic benefits, while others may have financial benefits.” Only by laying all the possible cards on the table can the client feel comfortable having chosen the best investor.
As it turns out, the intentionally-diverse buyer list tends to accomplish its goal. “Roughly 70% of time the clients are intrigued and surprised by some of the names on the list,” says Bailey. The broad list helps ensure that the client is seriously forced to consider their options.
However, diversity does not need to be driven only by the intermediary. Bailey admitted, “Often times, part of the diversity is driven by the interest of the client. Depending on their expectations and demands, the list can change dramatically.” He continued, “For example, whether or not the existing team plans to stay with the business could directly influence the type of buyers and investors you consider.” After the initial list, it is critical to engage in collaborative and cooperative conversations with the seller.
For the clients that are primarily concerned with price, diversity is just as important. “If your mandate is to maximize value, then diversity definitely contributes to that maximization,” explained Bailey. Only by sampling a wide swath of potential buyers can you — and the seller — feel certain that you have explored the entire range of prices.
If your list includes only one type of buyer — even at various sizes — you will likely receive fairly uniform offers. For example, if your list is entirely composed of financial buyers, you should expect a fairly conservative price. Bailey explained that many financials, “will most likely pursue the model of buy low and sell high. They will have a predisposition to value assets more conservatively and possibly use leverage. Combined, these can contribute to a lower valuation.”
Strategics on the other hand, might be willing to pay a little more, but may have other risk factors. Bailey explained, “Strategics are often a nice counterpoint to financials on any buyer list. However, like financials, they have their own constraints — namely, their shareholders. To the extent that they pursue a highly strategic, yet dilutive transaction, they must make a compelling case to their shareholders as it relates to that acquisition.”
The best strategy is to represent both financials and strategics into your list, even if the seller is initially cautious. Bailey explained, ”When you introduce different types of buyers into the mix, you generally get a wider range of offers. Not only does this give you a better sense of the company’s true worth, it can help you identify the best buyer at the best price.”
Although a diverse buyer list can offer benefits for you and your client, be careful not to get too diverse. “At end of day, you want diversity, but you don’t want to waste your clients’ or counterparties’ time,” cautioned Bailey. “There is a delicate balance of reaching outside the most immediate buyers, but not so far that you are unnecessarily wasting the time of less relevant buyers.”