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small fish swimming into big fish

Working with Corporate Acquirers: A Guide

Most large corporations have a reputation of being willing to pay higher multiples, usually meaning more cash overall, for businesses than ‘financial buyers’ like private equity groups would be willing to pay. Even though both are targeting similar returns on capital over a fairly short time frame, synergies arising from either amplifying revenue or diminishing costs post-acquisition, and ideally both, often allow strategic acquirers to pay more for your business. Financial buyers 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. Understanding which corporations would have the most interest in your business can be critical to helping you determine the best potential acquirers for your business.

Determine where you fit

The best way to start thinking about being acquired by a larger corporation is to think about which businesses would benefit the most by either owning your or by not letting their competitors own you. Dig deeply into the capabilities of your business, so you can better understand the avenues to take or where it could fit as a piece of a larger company. 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. To better visualize how you could fit as part of a potential strategic acquisition, it is advisable to build a matrix of the below strategies and aspects to map out potential transaction routes.

Understand possible acquirer criteria

Industry
Often, the most relevant company to buy you isn’t in your exact industry. Don’t confine your list of potential acquirers to companies in your concrete North American Industry Classification System (NAICS) definition. In your matrix include all adjacent industries.

Geography
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.

Size
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.

Customers
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.

Suppliers
While customer integration can boost revenue, using the same raw materials or suppliers can be another way to cut input costs by increasing buyer power of the combined business. A price break from buying in greater quantity can be a significant source of synergy, especially depending on the material price and the quantity of the commodity.

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 when the buyer has more than enough existing capacity. It can be tough to consider mass firings of your employees after a sale, so be sure to understand both the financial impact and the post-close plans of any potential acquirer. 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. Corporate acquirers are often flexible and keen on consummating joint ventures or minority equity transactions. Both options can provide you 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 potential acquirers

Trade journals and shows
You probably have a pretty good idea of which companies would be potential acquirers for your business, but there are almost always companies you may not have considered yet. Reading trade journals and attending conferences related to both your industry and the related industries you identified above by NAICS or SIC codes can help you discover new potential strategic relationships. National and regional journals run ads paid for by companies with enough scale to buy smaller firms. Conference sponsors are also likely to consider strategic acquisitions. Though you may have seen or heard about many of the firms in the past, revisiting them not as suppliers or competitors but as potential acquirers for your business can help you build a more robust list to consider when you sell.

Online networks
LinkedIn has become a robust business network and is a crucial tool as you start to dig into building strategic relationships. Often the first step in being acquired by a larger corporation is to begin partnership talks around smaller joint ventures or shared marketing ideas. By identifying the directors of corporate development or other potential partners on LinkedIn, you can reach out to the right person rather than wasting time working your way through the org chart.

Axial is another great way to connect with potential partners or strategic acquirers. The network is focused exclusively on making connections between the people most likely to partner with you on a joint venture, growth funding, or to potentially acquire your company. Even if you aren’t entirely sure who would be a perfect fit to work with your company, we can help you connect with the buyers or partners who best fit your business.

Private equity owned businesses
While private equity firms historically relied on financial engineering and “multiple arbitrage”, many specialist firms are completely changing they way they view investments. By building tight portfolios of related businesses, they’re beginning to operate more like holding companies. The strategy allows them to pursue bolt-on acquisitions for their existing companies that are evaluated the same way a larger corporate acquirer would evaluate a deal. Does the company add strategic protection or advantage in a given industry? Does the merger produce cost savings or synergies that will produce more profit overall? Rather than considering companies owned by private equity groups differently than you would any other corporation, treat them exactly the same. Would they be a good buyer of your business?

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 X, Y, Z the acquisition makes perfect sense, and is crucial to the future of your potential buyer’s business. While huge corporate strategic buyers like General Electric and Danaher have huge M&A teams constantly looking for acquisitions, smaller strategics tend to have less coverage overall so it is advantageous to actively seek them out.

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