If you are the owner of a successful business, you are regularly bombarded with solicitations from brokers who claim to have a buyer just begging to pay you top dollar for your business. You are probably sensible enough to realize that these solicitors are not the best persons to sell your business. But who is?
What we will call “Transaction Intermediaries” (TI) range from business brokers who specialize in selling Main Street restaurants and retail shops to Wall Street investment bankers who won’t touch a deal under $500 million. Good TIs are worth their weight in gold (or at least silver). That’s because they are knowledgeable in how to market your business to the right buyers and can get you a good price on good terms. They are also expensive, charging you anywhere from 5–10% of the sale price as a fee. Let’s look at TIs who specialize in the “Middle Market,” which we will define for these purposes as companies with a value ranging from $2–$50 million.
To select an appropriate TI, you must understand the dynamics of the sales process and understand how TIs operate. Many of the better TIs in this market have developed specialties—either industry specialties or specializing in categories of buyers—especially financial or strategic buyers. For this reason, a good place to start thinking about who should sell your business is to consider who is the most likely buyer of your business.
Business buyers in the Middle Market come in 2 flavors: “financial buyers” and “strategic buyers.” The classic financial buyer is a Private Equity Group (PEG). PEGs have their own capital and access to supplemental financing sources (banks, pension funds, insurance companies and a myriad of others) that allows them to go out into the market and buy businesses. They are primarily interested in a return on their investment. They are usually not interested in managing a business; therefore one of their selection criteria is that the target company has a solid management team in place that can run the business. There are many other types of financial buyers but they all have in common the fact that they are investors and not managers.
Strategic buyers on the other hand are typically larger companies in the same industry who want to acquire your business as an addition to their successful companies. They are of course interested in making money on the deal, but they view the acquisition as synergistic. Strategic buyers will usually blend the target company into their own operations and eliminate overhead and some management functions in the target because they are duplicates of what the acquirer already has in house. This is the classic situation in which the desired outcome is 2 + 2 = 5. The combined companies will be more profitable than the sum of the 2 separate companies. Strategic buyers will sometimes pay a higher price than a financial buyer because they expect to make a higher return.
The distinction between financial and strategic buyers is not always so clear-cut. For example, some Private Equity Groups specialize in a particular industry and accumulate several companies in the industry and in effect become strategic buyers as they make “add-on” acquisitions.
Transaction Intermediaries also come in different flavors. Some M & A firms specialize in selling to Private Equity Groups and/or other financial buyers. There are about 3,300 PEGs headquartered in the U.S. and thousands of other informal groups of investors looking to make business acquisitions. Every financial buyer has its own particular investment criteria. That means that only a very well-connected M & A firm is going to be able to sort through the maze of financial buyers to find one that might be interested in acquiring your business.
Financial buyers are in the business of making acquisitions. Strategic buyers are a different kettle of fish. Usually, strategic buyers don’t know that they are in the market to buy a company like yours until they are presented with the opportunity by an enterprising transaction intermediary. A TI experienced in engineering strategic sales will learn everything he can about your industry, your competitors, and your customers and try to understand how your company can create the highest value in combination with another player. Furthermore, the “strategic TIs” will work to create a controlled auction for your business—a situation in which several potential buyers are competing for the opportunity to buy your company. The important point for you, the seller, is that the skills and experience required to sell to financial buyers are different from those needed to market your company to strategic buyers. Many M & A firms catering to our “Middle Market” will specialize in selling to financial or strategic buyers, but not both.
There are also “strategic” M & A firms that are industry specialists. For example, there is an M & A firm that specializes in the food service industry. That firm will know every player in the industry from the largest publicly traded companies on down. It might be to your advantage to use an industry specialist M & A firm. However, sometimes these firms have a built-in conflict of interest—they might be representing you to a buyer this month and next month they might be representing that same buyer in a different acquisition transaction. They might not be inclined to bargain for the best deal for you today if they will be working for the buyer next month.
Understanding the dynamics of the sales process will help you know the right questions to ask when interviewing M & A firms. The more you can learn about the sales process ahead of time, the better you will be positioned to make a good choice of a TI.
Published in Business2Business magazine, August 2015