When it comes to submitting an initial indication of interest (IOI) for a business, the guidelines are typically quite clear. The banker will provide their bid preferences, usually asking for some variation on the following information:
- Approximate price range, usually either expressed in a dollar value range (e.g., $10 to $15 million) or as a multiple of EBITDA (e.g., 3-5x EBITDA)
- Buyer’s general availability of funds and sources of financing
- Necessary due diligence items and a rough estimate of the due diligence timeline
- Potential proposed elements of the transaction structure (asset vs. equity, leveraged transaction, cash vs. equity, etc.)
- Management retention plan and the role of the equity owner(s) post-transaction
- Timeframe to close the transaction
Seems straightforward — yet every banker is used to receiving IOIs that don’t follow the guidelines. There will be one that contains nothing but the price range. There will be a bidder who names a price that’s lower than reasonable market comps. There will be buyers who submit a bid weeks after the deadline. And there will be buyers who seem to be bidding blind, giving no indication of having researched the business or conducted any sort of due diligence ahead of time.
If you want to get off on the right foot with the banker (and the seller), these are not the ways to do so.
Sometimes buyers can get away with firing off a quick price range to a banker. But usually this only applies to well-known firms or companies with a track record in the industry that speaks for itself — say, a strategic buyer with a long history of acquisitions and clear synergies with the target. Especially if your firm does not fit this bill — for example, you’re an under-the-radar family office or a new search fund or a company that’s never done an add-on acquisition — it’s important to demonstrate your track record and interest right off the bat. The same goes for any buyer with a primary value proposition that hinges on a factor other than price.
How? First, pick up the phone before you submit the offer. Ask the banker questions. Introduce yourself in a meaningful, human way. Show why you’re interested in this particular deal and what you’ll bring to the table. “We always track how much due diligence buyers have been doing, by the number of times they’ve reached out, the questions they’ve asked. Even if your value is a little lower, if we know you’ve done the work, we’ll be more familiar with you and your opportunity to proceed over the course of a process is greater,” says Matt Miller, Director of Investment Banking at Schwartz & Co.
“The number one thing that we look at besides price is how much diligence and effort the offerer has put into the offer. How much time have they spent with the banker? Have they made additional requests for information? Are they familiar with industry dynamics? The biggest red flag to us is when we get an offer from somebody who we haven’t heard anything from during the time in which they’ve had the initial materials,” says Elizabeth Daniel, Vice President of Mergers & Acquisitions, Investment Banking at Stephens Inc.
One easy way to quash your chances in a process is to fail to submit a competitive offer. Conversations with the sell-side banker are useful here too. “They’re not going to give you a target number, but they will be able to tell you about what they’ve seen other businesses trade at recently. Or let’s say a family is selling a business and walking away completely. We can make it clear to the buyer that the owner is realistic about price expectations because they realize the management team is not continuing with the business. Talking with the banker gives you the information you need to submit an educated, competitive bid,” says Daniel.
For financial buyers who know they can’t compete with strategics on price, it’s useful to use these conversations and the offer letter itself to communicate your unique advantages as an acquirer. “Valuation is important, but there are lots of other things that go into an M&A deal. Management options and role structure, timing, certainty of close. Cultural fit is also big, particularly for family-owned businesses: they want to make sure that the buyer is going to take care of their people. The more detail a buyer can provide, the more helpful it will be to evaluating their bid,” says Daniel.
For firms without committed capital, being upfront about your funding is important. “It’s really helpful to spell out where you will go to get your capital and how much you have access to. Demonstrating your history and track record of being able to consistently raise funds will give us a better sense of certainty and speed to close,” says Miller.
Ultimately, bankers want to see that you as the buyer are serious, organized, and leaning into the deal. “Strategic acquirers, private equity firms, independent sponsors, family offices — we see almost every one of those buyers when we’re running a full process, and it is hard to distinguish yourself. You certainly need to distinguish yourself on price, but we’re also trying to understand a number of different factors including how you’re going to get to the finish line quickly, because time equals risk for our clients,” says Marshall McKissack, Managing Director and Head of M&A at Stephens Inc.