Regardless of how many potential buyers are in the universe for a particular deal, many advisors do not blast out teasers to every single one. On the Axial network, the average buyer report contains 63 buyers, yet advisors choose to ultimately interact with, on average, seven of them. How do advisors decide who to send the deal to? After talking to a few advisors, we found that they narrow their buyer lists down based on three common considerations, underneath all of which flows the advisor’s commitment to his relationship with his client, not to mention his own professional success and reputation:
Alignment with Investment Strategy
Advisors aren’t going to pitch an opportunity for a management buyout of an industrial machines company to a buyer specialized in purchasing software companies and implanting management. A buyer’s strategy – rolling up an industry, buying out single companies, or strategically expanding into new markets – can yield a more efficient deal sourcing process for buyers if they market it properly to the seller community. Speaking privately about previous deals, an M&A banker who used to work at a bulge bracket firm in London said, “For strategic buyers the most important thing is how a company integrates into their business. I’ve seen a deal where a buyer goes through due diligence only to come back and squash [the deal] because the business models were too divergent.”
Buyers who clearly state what kind of businesses they are looking for are more likely to receive quality, relevant opportunities from advisors than those buyers with vague messages about what they’re seeking. We’ve found that when selling a company advisors are 43% more likely to interact with buyers who clearly state what they’re looking for in an investment and demonstrate a level of specialization. In turn, such specialized buyers are 22% more likely to reciprocate the interaction by offering quality responses to the advisor.
Probability of Close
A banking analyst on the West coast told us emphatically, “It’s always the goal to maximize the probability of close. Everything that goes into targeting a relevant buyer list is to try to get across the finish line.” Deal experience, reputation, clearly specialized goals, and strategic rationale impact an advisor’s gauge of how likely a buyer is to ultimately consummate a sale process with a handshake, a signature, and a happy seller. If the advisor is not optimistic about buyers closing a deal, there is no point in wasting time, energy, and patience talking to them. Without a level of confidence in buyer interest and certainty that the deal will close, no other factors, seller compensation or close speed, matter.
Access to Capital
An advisor will have set proper expectations surrounding purchase price and deal structure for sellers. As a result, advisors will only approach buyers who can demonstrate that they are adequately capitalized to meet at least the low end of the seller’s hypothesized deal terms.
The ex-London banker also spoke about the importance of capital: “When we screen a buyer, how much money they really have is a big question. The more they can pay, the more upside to price there is… There are some big companies that either just aren’t acquisitive or don’t have much cash right now. Some other companies are notorious for looking at a lot of deals but never writing a check because the corporate structure is too complex.”
Ample capital increases the likelihood of consummating a quick transaction rather than a slow one, an important issue to a seller once an agreement has been reached and due diligence is under way. Predetermined access to capital helps foster a smoother, faster transaction than one in which at the buyer is scrambling to cobble together financing at the last minute, saving the seller team a lot of anxiety as well.
For buyers, clearly articulating your investment criteria gives you better, more quality deal flow. Advisors look for buyers interested in and capable of doing their deal, possessing a stellar reputation built over the years. Such qualities instill the necessary confidence in advisors and help buyers stand out against competitors when a deal comes to market.