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Connecting with the Right Strategic Buyer

Most large corporate acquirers target return on capital of ten percent over two to three years. Synergies arising from either amplifying revenue or diminishing costs, and ideally both, induce higher valuations from strategic firms which in turn yield higher selling prices for business owners. Stereotypically financial buyers pay less, as they tend not to have an existing business into which to fold an acquisition, and instead augment profits by increasing operational efficiencies and leveraging personal networks. However, this stereotype, like most, is not completely true (more on this below).

Determine where you fit in a strategy

Look at the big picture and ask yourself, “What type of company would be interested in buying me? Why? And where would I fit?” Be sure to talk to your client and understand the vision and considered capabilities of the business so as to better know the avenues to take or where it could fit as a piece of a larger company. To better visualize the positioning, it is advisable to build a matrix of the below strategies and aspects to map out the potential transaction routes.

In the case a business has a unique comparative advantage, it might be cheaper for a larger competitor to buy the business than to compete with it through time-consuming organic growth investments. This type of acquisition is referred to as a bolt-on, in which a strategic buyer folds a target into an existing business department.

Use Filters to Narrow down your possible acquirer criteria

After doing the above strategy analysis, it should become clear that you do not need to confine your buyer list to companies in your concrete North American Industry Classification System (NAICS) definition. In your matrix include all adjacent industries.

Unless your business is a website, it goes without saying that location, location, location is of high import to an acquirer, either to strengthen share in a certain region or to expand scope to new territories.

Most likely a potential buyer needs to be considerably larger than your client’s business, but this is not always necessarily true. More important is the available purchasing power of the acquirer, be it cash, equity, or debt.

Do you have overlapping customers and sell complementary products, or do you have different customers and sell the same thing? Customer and distribution acquisition are seminal drivers of revenue synergies.

Whereas customer integration can boost revenue, using the same raw materials or suppliers can possibly cut input costs by increasing buyer power of the combined business. A price break from buying in greater quantitycan be a significant source of synergy, especially depending on the material price and the quantity of the material, the ecoomocs of the comodity, and should be considered.

Human resources
Another traditional cost synergy is reducing headcount and redundant job functions, the traditional example of slashing a call center or selling a factory which capacity can fit in that of the buyer’s. This may be tough as an owner to facilitate the mass firing of your employees, so that’s a decision you need to make. Perhaps you could work out some kind of compensation structure for your employees who will be redundant and the source of synergy with whoever buys your company.

Transaction type
Acquisitions do not always take the form of pure buyouts or even majority investments. Strategics are flexible and keen on consummating joint ventures and minority equity transactions. Both options provide your client with invaluable resources by which to grow. Pharmaceutical companies often invest in start-up companies focused on research or technology, with the option to eventually buy outright upon success.

Identify the correct buyers to connect with

Trade journals and shows
Pick up literature and attend conferences pertaining to identified relevant industries to narrow down the relevant players. National and regional journals invariably run ads paid for by companies with enough scale to buy smaller firms. Conferences and events will introduce you to new people as well.

Online networks
LinkedIn is a crucial business tool, and if you’re not already using it you should sign up today. The reach and depth of the network are simply unmatched for professionals of all types in all regions of the country and world. After signing up and “connecting” with friends and acquaintances, start joining some of the myriad relevant groups to begin engaging and networking with those people who you do not already know. Groups range across most topics you can think of, and in them you will find discussions put forth by potential buyers.

Axial to find strategic buyers. Buyers on the network maintain and continually update forward-looking transaction profiles that articulate their investment mandates exclusive to the network.

Private equity strategics
Standard talk tends to be Strategic v.s. Financial buyers, but financial buyers are increasingly also strategic buyers. Private equity firms, especially specialists, don’t just rely on financial engineering and “multiple arbitrage” across the board anymore, but instead build portfolio segments the same way corporations do.

Stock market indices
Arguably the best way to research a publicly-traded company is to read its SEC financial statements, 10-K’s and 10-Q’s, and to listen to or read transcripts of earnings calls and conference presentations. The Management Discussion and Analysis section of the 10-K Annual Report highlights the strategic direction of the company, and in doing so can signal if and where you fit.

Once you’ve found prospective buyers, it’s time to reach out to them. Draft, upload, and send your NDA, and include a message explaining your rationale, recounting that your due diligence has led you to believe that for reasons XYZ the acquisition makes perfect sense, and is crucial to the future of your potential buyer’s business. Huge corporate strategic buyers like General Electric and Danaher have M&A teams sometimes bigger than Morgan Stanley or Goldman Sachs, and on top of that have bankers constantly pitching them a million ideas. Smaller strategics tend not to have either luxury, so it is advantageous to actively seek them out.

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