By Len Russek
Managing Director, Broker
Transworld M&A Advisors
From time to time, owners of mid-size businesses receive calls or letters from potential buyers expressing interest in acquiring their business. Most owners are flattered to be courted, even if it’s a competitor who is calling. So, how might the business owner respond?
Today, the caller is most frequently either;
1. an intermediary seeking to find a company for a buying client,
2. an intermediary seeking to represent the owner in helping them sell,
3. a private equity group (PEG), a search fund, an independent sponsor, or similar,
4. and, lastly it might be a competitor or a potential strategic buyer.
So what do you say after Hello? Let’s discuss the list in reverse, since I could personally be the intermediary in 1 or 2 above. In all cases, the first step is to get an acceptable Non-Disclosure Agreement (NDA) in place before sharing information. A respectable intermediary will usually offer to immediately send you a signed NDA.
If the caller is a competitor or supplier that you have previously met, you certainly want to maintain the relationship, so after the NDA is in place, it’s time to share data. If you have not been through the process of selling a business before, your tendency may be to just provide whatever information the prospective buyer requests, as they request it. However, in many cases, the prospective buyer is also not experienced in buying companies and may be unsure about what information they need. This can result in crucial information not being discovered until due diligence that might negatively impact the buyer’s valuation and motivation to close. Then your deal doesn’t close either because the buyer assumes you are misleading them, or they are embarrassed they did not think to ask for the right information earlier in the process. In either case, if the buyer is from Corporate America (typically an ideal strategic buyer) the deal just dies on the vine and you may never have a clue what happened. You will likely feel that you just got left at the altar.
Before you share any information whether the caller is a strategic buyer, competitor or a private equity group, the first two things you want to learn is how your company fits with their existing portfolio companies AND do they have enough money. Even a PEG with discretionary funds to invest, may be running low on funds depending upon where they are in the life of their fund and other investments already made. However, the ones you have to be the most careful about are the unfunded search funds, independent sponsors, or something similar by a different name. Just as you might imagine, these are buyers with no money, who claim to have investors who will invest in the deals they find – maybe. Some are former employees of funded PEGs that have not yet raised a new fund and others are just seeking to tie up your company with a Letter of Intent for 90-180 days while they go search for financial backers – debt and equity. In some cases, the caller may be from an unfunded search fund that claims to be backed by independent sponsors, which only make things more complex and your sale even more unlikely to close. Some funded PEGs will look at these deals, but many will just pass if there are several layers of search funds and independent sponsors all looking for a piece of your deal or a finder’s fee.
One of the benefits of having an experienced intermediary working for you is that we know how to ask the PEGs and PEG-like folks the rude questions about their available funds. Depending upon your personality, you may feel that you can just ask the tough questions yourself, but are you sure that you have the current street savvy to fully understand the answer? I’m contacted several times each week by PEGs and PEG-like companies looking for companies to acquire. Although I’ve been dealing with PEGs for over 30 years, sometimes even after I’ve called other funded PEGs that I’ve known for years, I’m frequently still unable to quickly confirm a PEG-like firm really has access to sufficient money to close.
Some may claim to be the investment representatives for a family office, but that really does not disclose the amount of funds available. Even if I’m impressed by the name of the wealthy person who is providing the funds, I still don’t always know in advance the amount of funds available. However, I do know how to confirm a PEG’s available investment funds prior to taking your company off the market by you signing an LOI, but it’s getting harder to know this prior to sharing basic information about your company and talking with the PEG.
So, now let’s discuss when the intermediaries like me call you. Since the most desirable relationship you want with an intermediary is based upon trust, be immediately cautious with the ones who seem to be just blowing smoke. Some intermediaries promote they can bring “International Buyers” who will overpay for your company. This is typically untrue. In today’s world, contacting buyers in other countries is not hard. Most such buyers are not hiding if they are really interested and capable of buying companies in the US. They frequently contact me and others like me to tell us of their interests. My experience is they are just as cautious and financially diligent as the buyers located in the US, maybe even more so since they face higher costs to monitor their US investments. It may also take longer for them to make a commitment to buy.
If the intermediary is calling because he has a “client” that could be interested in buying your business, your first question might be, “Do you have a fiduciary relationship with your buyer?” Your second question might be, “When will you disclose your client’s identity and provide me information as to their financial capability?” If they do not have a fiduciary relationship or cannot even tell you the name of their client, then it’s most likely that you are talking with someone whom you might just want to bid “Good day!”
Most intermediaries know of buyers for whom your business appears to be a potential fit. Some may say I think I have a buyer for your business and I’m interested in representing you in approaching this buyer as well as many other prospective buyers who might be interested. This is quite different from the intermediary in the previous paragraph since they are not misleading you; they are only seeking to entice you by flashing. If the intermediary has been in business for very long, they are likely to have buyers who would be interested in your type of business. Since you want your intermediary to have a fiduciary relationship with you to represent your best interests, the integrity of the intermediary is crucial. Transparency is just too important in the sale of your business to be working with an intermediary who plays loose with the facts or your best interests.
So far, all that we have talked about relates to finding the right buyer. Finding buyers is the easy part. They are not hiding and today they have plenty of money to invest. As I look back over the deals I’ve done, I provided some value to the seller from my expertise in writing the Confidential Information Memorandum so that it accurately and completely describes the business. I also provided value by motivating buyers to make a viable offer. However, the greatest value I provided came during the deal structuring, due diligence and negotiating the language of the purchase agreements. This is where training and experience matters more than the name of the company that employs the intermediary. Most buyers of mid-size companies have a team of experienced deal makers which may put you at a significant disadvantage unless you have an experienced intermediary and legal Advisor on your side.
Unfortunately, there are no magic words which an intermediary can whisper in the ear of buyers that will get you a higher price. The attractiveness of your industry coupled with the earnings of your business and its interest to the buyer is what drives the price and terms.
Some believe that holding a competitive auction gets the best price, and they may show some evidence to support this. However, in an auction, the best price may not always come from the best buyer. Also, many attractive buyers today refuse to participate in auctions. Auctions typically work better for selling larger companies (Revenues greater than $100 million) than for smaller middle market companies where the personal relationship between buyer and seller are more significant to a long-term successful transaction.
When selling your business, there are three important things; Price, Confidentiality and Speed to closing. You only get to pick two. For example, if you select Price and Speed, then you must give up on Confidentiality. If you select Confidentiality and Speed then anticipate a lower Price. Choose Confidentiality and Price and it will just take longer.
- Len Russek, a former CPA has been a Mergers & Acquisitions Advisor for over 25 years both inside large corporations and as an intermediary during which he has been involved in structuring and negotiating the sale of hundreds of businesses. Contact him at 727-894-7888 or LRussek@TransworldMA.com