When looking to sell the business, don’t forget strategic buyers
By Victoria Fox, for SBT
Most business owners believe they already know the three or four most logical buyers for their respective businesses.
Owners usually assume that those potential buyers would be competitors or complementary businesses.
Sometimes the owners are right, and they can efficiently complete a transaction with the assistance of an experienced business attorney.
But, more often, they’re missing out on finding the right buyer offering the best price and terms.
Or, after contacting the logical buyers and finding minimal interest, owners may realize expanded marketing efforts are needed to maximize the value they will receive.
So how does a business owner find the right buyer for the business? Buyers are usually categorized as "strategic" or "financial."
Strategic buyers
An owner typically wants to sell to a strategic buyer. Strategic buyers are theoretically more motivated to acquire a complementary business and have a reputation for paying the highest price, which they justify through expected synergies or cost savings realized by the combined entity.
The acquired business could provide the buyer with access to new customers or market niches, offer cross-selling opportunities or reduce redundant operating costs. The chance to "take out a competitor" is also a potential benefit to strategic buyers. However, strategic buyers are not necessarily eager to share those synergies with the seller through a higher purchase price.
Strategic buyers typically come in more shapes and sizes than an owner may initially realize. Strategic buyers could include competitors, companies with similar products in different geographic locations, companies selling complementary products through the same distribution channels, companies that use similar manufacturing processes or component parts and private equity firms with similar portfolio companies.
Financial buyers
The notion of private equity firms as strategic buyers is a new concept for most business owners. Private equity firms, which raise funds specifically for acquiring and growing companies, are often viewed as financial buyers.
Often, though, an established private equity firm owns several "platform" businesses and seeks to build those platform companies through add-on acquisitions of complementary businesses.
Private equity firms are increasingly becoming strategic buyers as they seek add-on acquisitions for existing portfolio companies.
There are thousands of private equity firms in the US with the capital and motivation to acquire businesses. Industry reports indicate that those firms have raised more than $100 billion of capital that is available to be invested. The firms are under pressure from their investors to deploy this capital.
Investment activity among buyout firms slowed significantly during the last few years as they dealt with problems within existing portfolio companies. In recent months, investment activity has picked up, and private equity firms seem more eager to invest in new acquisition opportunities as well as raise new funds.
While many of those private equity firms focus on transactions involving larger companies with revenue above $25 million, there are hundreds of private equity firms interested in smaller platform companies and even smaller companies as add-on acquisitions, particularly if the company exhibits good growth potential or provides access to a niche or customer base not currently served by the platform company.
However, not every business is well suited as a potential private equity investment. Private equity firms are typically interested in businesses with growth opportunities and strong management in place. Their focus is to grow the business organically, as well as through acquisitions, during the five- to seven-year timeframe that they intend to own the business.
Another potential benefit of attracting a private equity buyer is the possibility for a recapitalization. Occasionally, an owner would like to sell a significant stake in the business while retaining a minority interest. The owner typically stays involved to help grow the business with the help and support of the private equity firm and then gets a second bite at the apple when the private equity firm sells the business, hopefully at a much higher price.
Finding a private equity firm that owns similar companies improves an owner’s sale options. Yet, identifying which private equity firms own businesses within a given industry is difficult and time consuming. There are few searchable lists readily available.
Established M&A advisory firms typically track the portfolio holdings and acquisition criteria for private equity groups and can identify firms with similar portfolio companies that are likely to have an interest. And they typically have the resources to thoroughly research an industry for strategic buyers as well as identify private equity firms that may have a strategic interest.
Identifying stragetic buyers
There are many ways to identify strategic buyers. The most common is to sort through various directories and databases listing companies by industry or Standard Industrial Code (SIC). Another is by analyzing transactions that occurred within the same industry and looking at which companies made acquisitions. Those buyers may have an interest in additional acquisitions or, if the buyers are in a slightly different industry, their motivation may offer insight into other potential buyer groups that may be considered strategic.
Another way of identifying the right buyer for a business is through the owner’s existing network of advisors. Attorneys, accountants and bankers can be good sources of potential buyers that may not have otherwise been uncovered.
Financial buyers should not be overlooked either, as they sometimes end up being the best fit for a business. They may have industry experience or knowledge they can use to make an immediate improvement to a business. They may sometimes be even more eager to make an acquisition, especially if they are under pressure to invest funds.
Balancing an owner’s desire for confidentiality with the opportunity to develop multiple competing offers by contacting a larger pool of prospects can be challenging. For an owner to be confident that he or she has the right buyer at the best price and terms requires thoroughly researching the market for strategic as well as financial buyers.
In one of our recent sale engagements, the seller originally thought his company could be sold by selectively contacting a handful of national companies he considered to be the most logical buyers. None had a strong interest, so we agreed to expand our marketing efforts and contacted a number of complementary businesses, a few private equity firms, high net-worth individuals and select contacts within our network of attorneys and bankers. We now have eight interested parties reviewing the offering materials and expect three or four competitive offers for the business.
Business owners would be well advised to broaden their perception of strategic buyers, while not ruling out financial buyers. We have often found that a broader marketing effort can uncover non-obvious strategic buyers and results in higher values received by the seller. And, more often than not, the ultimate buyer is not the one that initially appeared to be the most logical.
Victoria Fox is director of mergers & acquisitions at Emory Business Valuation, a Milwaukee-based firm that provides comprehensive merger & acquisition and business valuation advisory services for middle-market corporate clients.
May 30, 2003 Small Business Times, Milwaukee
