Today’s M&A environment is extraordinarily competitive, making it harder than ever for buyers to stand out from the crowd and earn well-priced deals.
As we emerge from the pandemic, buyers find themselves pursuing a limited pool of high-quality companies, creating a supply-and-demand imbalance that drives valuations higher. Prospective sellers are being contacted on a weekly basis by private equity, family office, and strategic acquirers proactively seeking proprietary deal flow to augment their acquisition strategy.
To generate steady deal flow in this environment, buyers need to take additional steps to differentiate themselves. In addition to purchase price, sellers today are increasingly concerned with deal factors related to the success of their business post-acquisition. Buyers need to be prepared to effectively communicate their value proposition and why they are the best partner for the deal. Ultimately, valuation will still be a significant factor in negotiations, but access to capital is not a factor in most cases. Given that sellers cannot engage in meaningful discussions with every potential buyer that reaches out to them, it is imperative that today’s buyers do some up-front preparation to ensure they are getting ample at-bats.
Here are a few ideas on how to differentiate yourself as a buyer in today’s M&A landscape:
Walk a Mile in the Seller’s Shoes
Put yourself in a Seller’s shoes. Why should a seller be excited and energized at the potential for a deal with your firm? Sellers need to understand why you are a better buyer than the others they are talking to.
Consider sellers’ motivations for selling, their long-term goals, and why they should be excited to be acquired by you as opposed to another buyer. Research your competition and identify what their selling points might be. Then be prepared to explain how your firm will be a better fit.
Think Outside the Box
Industry operating experience, a track record of success, interest in a seller’s industry, are table stakes in today’s M&A environment. Peel back the layers of the onion to find more creative selling points: How will you help their business grow into new markets? How will you provide new growth opportunities for employees? Do you have access to customers or vendors that would benefit the seller? Be prepared to explain how you can drive value to the business and its employees after the deal closing.
Commit for the Long Term
Today’s sellers are increasingly concerned with post-transaction plans surrounding employees, communities and facilities. Many small- and medium-sized businesses have a positive reputation in their community that they wish to uphold. Buyers are wise to discuss plans and opportunities for current employees, management, and operating location as early in the process as possible.
These plans may not be known at the initial conversation. The successful buyer will work hard to show that these long-term issues are being carefully considered ahead of time. Competitors will likely talk about preserving a seller’s legacy, but you can stand out with a detailed vision for how to do so.
Devise Flexible Deal Structures
Flexible deal structures have been well received by sellers as buyers have increased flexibility to win deals. We have seen an increase in sellers rolling equity in the deal to participate in future strength. Equity incentives for management teams have proven successful and ensured full commitment from executives tasked with driving the growth strategy of the buyer. A variety of case studies promote the idea of this “second bite of the apple.”
Cash is still king. While we are seeing fewer earnouts and contingent payment hurdles for sellers, cash buyers should make it known right from the jump. Sellers like the flexibility of cash deals as they are in a better position to negotiate for cash at closing, require tighter diligence windows, receive reps and warranties, indemnification, and more. Buyers that have this wiggle room on structure can win deals while the sellers get the terms they seek.
If you are looking to grow via acquisition, be prepared for serious competition. Do not fall victim to thinking what worked in the past will continue to work moving forward. You have one shot to grab a seller’s attention. Come out of the gate strong and deploy these tools to stand out from the crowd and close the deal.
Jason Kraynak is Vice President at Copper Run. He focuses on assisting families and privately held business clients in their growth through acquisitions and in meeting their liquidity objectives.