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February 28, 2021

You Got the Call … Now What?

Every business owner I know receives multiple calls and emails each week from groups suggesting they – or “someone they are working with” – are interested in buying the owner’s company.

It’s nice to be wanted, but it’s likely that the majority of these callers are brokers hoping to spark a conversation about the hot M&A market. Keep in mind, if a caller can’t tell you the name of the client they are prospecting for, you are the prospective client.

Another set of callers may be private equity groups or their representatives looking for their next investment platform. But given the limited amount of publicly available information on private companies, this group rarely knows for sure if your company fits their criteria. Checking their website or asking what type and size of business they are looking for often reveals there is nothing further to be discussed.

There is one call that gets an owner’s attention, however – the one from the long-time competitor, industry consolidator, key vendor or customer. In other words, someone with which the fit is obvious  and who really does understand your business. This call must reflect sincere interest and not just be a fishing expedition, right? This will be the buyer that will pay the most, right? You need to jump on this now or they’ll move onto someone else, right? … Right?

This is the situation a number of our clients have found themselves in over the years. Having ignored the generic emails and voicemail solicitations coming in every week, the interest of a known industry player suddenly changes the game. They come to us asking what they should do, and we share the following playbook.

Know your options

We always say, it’s impossible to make the right decision if you don’t know your alternatives. The familiar industry buyer may appear to be an attractive option. Maybe they have done lots of deals. You might know other owners who have sold to them and who seem to be happy. Becoming part of their platform could be a real badge of honor. All great – but that doesn’t mean there aren’t other alternatives that might be even better.

First, if one strategic buyer is interested, it’s likely that others would see the same opportunity. Second, private equity groups (including strategic acquirers backed by private equity) are now active participants in nearly every industry segment. The amount of money controlled by private equity funds has become so substantial – an estimated $900 billion raised and unspent by investors in the U.S. alone – and the impetus to put that capital to work so compelling, that financial buyers have become some of the most aggressive.

At one time, it made sense to assume a strategic buyer would pay the most based on revenue and cost synergies. But in recent years, we have frequently seen financial buyers make the most compelling offers from both value and structure perspectives. Although their initial expectation was that the industry buyer would prevail, our clients have in many instances received significantly higher proceeds from private equity buyers who we recruited into the process.

We also coach our clients to consider how their personal objectives align with the different buyer types. If an owner is looking to exit the business entirely and eliminate future equity risk, selling to an all-cash strategic buyer who won’t require the owner’s ongoing involvement may be the best option. However, in many cases our clients are looking to achieve significant personal liquidity or portfolio diversification while remaining with the company to pursue continued growth opportunities. Here, maintaining industry independence, retaining a portion of ownership (and equity upside), and leveraging a private equity partner’s expertise and access to capital can be a better fit.

Set your own timeline

Understanding your options sounds fine in principle, but the industry buyer is pushing you to respond. Do you risk losing them as an option if you don’t agree to move forward immediately?

This concern is understandable, particularly given many owners’ preconception that the industry buyer is the best buyer. However, a sincere suitor won’t walk away over an owner’s desire to evaluate alternatives. If they are truly interested in your business and see a good strategic fit today, that interest will exist several weeks from now.

While a buyer may prefer not to have any competition, he can hardly object to an owner (whom he is simultaneously courting) who says this represents her most significant decision, that she was not actively thinking about selling and that she owes it to her employees (and other shareholders) to consider a range of options.

Effective communication is key. A buyer’s continued interest is based primarily on their perception of how likely a deal is to happen, so hearing that the owner is taking steps towards a deal is a positive development. The message to send is that you are going to take a few weeks to assemble the information the suitor will need to properly assess the opportunity, that you want to understand what other options might be available but that you are committed to going through with a transaction if there is a deal that meets your objectives, that you intend to reach out to a very limited number of parties and that you will certainly include the industry buyer among them.

Have experts on your side

Any time an owner is considering an M&A transaction, it is critical to have experienced advisors on his or her side. This is necessary to level the playing field relative to the highly experienced professional dealmakers representing industry buyers and private equity groups, and ensures you are fully prepared for the process to come. Evaluating the business from the financial and legal perspectives, and assembling the information that will tell the best story to prospective buyers helps to validate value and structure expectations. This organized approach also avoids negative surprises down the road and supports continued momentum once conversations have begun.

Using the services of an M&A advisor sends a signal to the market that there will be competition for the deal and that prospective buyers will need to put their best foot forward when making offers. In some respects, this is actually viewed as a positive by experienced buyers, who know that the financials and other details of the business have been reviewed by other deal professionals and that the owner is serious about pursuing a transaction. For a seller, the value of relying on someone who manages these types of process for a living – being one step removed from critical negotiations and not being overly distracted from the day-to day-management of the business – is clear. Recognize also that the M&A advisor plays a critical role as translator – or bridge – between the often-divergent personalities and perspectives of buyers and sellers, and helps preserve the relationship between those parties even when negotiations get tough.

Having the input and support of experienced legal, tax and wealth management counsel is also valuable in identifying any key deal parameters that need to be included, and taking any recommended steps to maximize after-tax proceeds and achieve estate planning goals.

If the call from the high-profile industry buyer is the signal that now is the time to consider a sale of your business, take control over your destiny and maximize negotiating leverage by:

  • Assembling a strong team of professional advisors
  • Establishing your personal objectives
  • Identifying and evaluating your viable alternatives
  • Organizing a proactive and targeted process  

Most owners have more options than they realize. When handled correctly, they can put themselves in a position to choose from several attractive, real and actionable paths.

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