bThis article is part of our series on Selling Private Companies. In this post, we review the various techniques a business owner can employ in approaching buyers when selling their company, the pros and cons of the different techinques, and provide some recommendations based on Axial’s observations working with hundreds of private mid-sized businesses.
When you decide to sell your company as an owner and/or management team, one of the first things you will want to do is begin researching and building a “Buyer List.” The Buyer List is a list of corporations, investment firms and individuals to be approached during the M&A sale process. Potential buyers fall into two primary categories:
- Strategic Buyers — These are operating companies that provide products or services and are often competitors, suppliers or customers of your firm. They can also be unrelated to your company, but looking to grow in your market to diversify their revenue sources. Their goal is to identify companies whose products or services can synergistically integrate with their existing business.
- Financial Buyers — These include private equity firms (also known as “financial sponsors”), venture capital firms, hedge funds, family investment offices, and high net worth individuals. They are in the business of making investments in companies and realizing a return on their investments.
Once you have researched and built the Buyer List, a key decision is to determine how many buyers you will approach and whether you will employ a sequenced or parallel process. There are three general techniques:
- Serial Approach/Negotiated Sale: You identify and contact the most logical potential buyer(s). You approach one buyer at a time and negotiate exclusively with that buyer. If unsuccessful, you approach the next party and continue to work your way down your list until you find a buyer.
- Targeted Auction: With this M&A process, you discretely contact a limited number of potential buyers. Typically, you will approach between 5 and 20 buyers, solicit indications of interest, and then negotiate with the most appropriate and interested buyers.
- Full Auction: You identify and contact a broad universe of potential buyers. Strategic buyers will include firms that are your competitors, suppliers, and customers. It will also include “creative” strategic buyers that are not currently operating in your industry. In terms of financial buyers, you will go out to a sizable number of investment firms and executives with the financial wherewithal to buy your company.
Each approach has strengths and weaknesses. The strengths of the “Serial Approach/Negotiated Sale” or “Targeted Auction” include reducing disruption to your business and limiting the chances of confidential information leaking out. However, we have observed that those sellers who initially identify and approach a more thorough universe of qualified buyers are more likely to have a successful sale process. While certain circumstances can uniquely call for the limited approaches, they are very risky for business owners. The reality is that there are a tremendous number of considerations that a buyer is making when deciding whether or not to make an offer for your business. Many of these considerations can have nothing to do with your actual business. For example, perhaps you approach the ideal financial buyer only to realize that they are raising capital for their next fund and can not get the deal done; or you approach the perfect strategic buyer but their CEO is focused elsewhere or still integrating a recent transaction.
Important things to consider in a sale process are:
- You Never Know For Sure Who the Buyer is Going to Be. Buyers’ investment decisions are influenced by many factors, many of which you will never fully know. In all the sale processes we have been involved in, only a small fraction of the time does the initially identified “perfect” buyer end up being the actual buyer.
- Time and Effort Required to Prepare is Constant. To realize the best outcome in a sale process, significant time and effort is required. You have to think strategically and critically about your business. You have to gather legal and financial information, assist in the preparation of marketing materials, build your forecasts and upload documents into a data room. You have to emotionally prepare for the roller-coaster ride of the sale process. All of this is required whether you are approaching 1 potential buyer, 10 buyers, or 100.
- More Potential Buyers Usually Means More Options. As we discussed in “10 Consideration Other Than The Purchase Price,” there are many terms and issues other than purchase price which are crucial to negotiate in a business sale. Different buyers will often propose different structures and bring different strengths and weaknesses to the table. By having more options, you increase the likelihood of finding a buyer and deal structure that fits all of your goals.
- Full Auction Process Reduces Chance of Deal Fatigue. When employing limited approaches, sale processes tend to drag on. The management team and advisor are negotiating with one or two parties at a time and it is difficult to build momentum. When buyers see an opportunity and are excited about it, you want to build off of this initial enthusiasm. As time passes, other opportunities will come across their desk and their interest in your company can fade. By building a sufficient buyer list and keeping to a schedule of well-known milestones for preliminary and firm indications of interest, you generate momentum in your sale process and avoid deal fatigue.
- Multiple Interested Buyers Leads to Price Discovery. Price and value are two very different concepts, and we will be covering this topic in an upcoming posting). Different buyers can have differing views on the value of your company. In turn, they will be willing to pay differing prices. You may or may not like what you hear, but the more potential buyers you hear from, the better you will know what the market believes the current price of your business is.
Selling a business is a serious and complex process. While managing multiple buyers can be challenging, it is necessary to give yourself the best chance of closing a successful deal.
What is the right number of buyers to have on your Buyer List? It depends on your situation. We advise to err on the side of more than less. In the end, it is not about knowing the perfect buyer when the process begins. It is about finding the right party that will structure a transaction to fit your particular needs and ensure your business is positioned to thrive in its next phase.