Oftentimes, prospective sellers envision a sale to a strategic buyer, but seldom do they know where to start or how to assure they are reaching the right strategic buyers. “Right” is the operative word because sellers will spin their wheels if they don’t market to the most opportune buyers within the strategic universe. Or equally unfortunate, sellers will unravel along a deal path with a less-than-qualified strategic buyer, incapable of providing the most favorable deal. We set forth five basics to identifying strategic buyers for your business:
1. Exhaust (And Don’t Miss) the Obvious Buyers
This one might seem obvious, because it is obvious. However, we have seen sellers attempt to sell on their own and miss obvious strategic buyers within their industry. We hear things like “I didn’t contact them because I know that guy and he wouldn’t be interested” or “we compete with them and I don’t feel comfortable sharing information.” An investment banker will have solutions to these roadblocks, and will make sure to protect you and your business along the way. Sometimes that means constructing special materials with redacted information. It is paramount that you reach out to the obvious strategic buyers (i.e. competitors, industry leaders, top customers, etc.), regardless of predispositions. A skilled investment banker will bring a deep industry rolodex and ability to navigate sensitive situations.
2. Think Outside the Box
The most promising strategic buyers for your business may not be the ones that come to mind first. In fact, your business could be most valuable to buyers in neighboring industries, or buyers that have something to gain by expanding into your core market of products/services. This part requires experience, creativity, and a strong understanding of industry dynamics. Include buyers that could benefit from horizontal expansion: companies in related industries potentially seeking to increase size, diversify products/services, achieve economies of scale, reduce competition, or gain access to new customers or markets. Include buyers that could benefit from vertical expansion: companies potentially interested in strengthening supply chain, reducing production costs, capturing upstream/downstream profits, or accessing downstream distribution channels by acquiring along the supply chain.
3. Find the Active Buyers
Every industry has pockets of highly acquisitive buyers. This list of industry players is ever changing. It pays to have a team of advisors on your side, aware of relevant market activity and recent consolidations. Companies that have made three or four acquisitions in the last year are clearly pursuing an aggressive growth plan. Oftentimes these are “quasi-strategic” buyers (companies in your industry backed by Private Equity capital), who are willing to stretch further than other strategic buyers and are incentivized to execute acquisitions. As a seller, it is important to get in front of these groups and have a viable path to do so.
4. Verify Ability to Execute
It is essential that each strategic buyer is screened for capacity and means to execute a transaction of adequate scale. This can be tricky, especially when information on middle market companies can be partial and imperfect. When financial information is available, the advisor will validate sales, profitability, cash flows, and leverage levels. Financial buyers are very clear about desired transaction size and capacity to invest, whereas the strategic universe is less transparent. As a seller, you take on unneeded risk when contacting unqualified strategics, who have no business learning about a transaction of unreachable value. Experienced investment banking teams are well-versed in dealing with imperfect information, and can use alternative metrics to triangulate a business’s acquisition capacity (number of locations, employees, facility square footage, customer base, etc.).
5. Stretch the Geography
To find the most qualified strategic buyers, sometimes that means venturing to new geographies not previously considered (think Marvin Gaye – Ain’t No Mountain High Enough). Sometimes a business’s operations are geographically limited, but that doesn’t necessarily mean the strategic buyer universe should follow suit. You never know when international companies and industry leaders are looking to expand geographically. Perhaps these businesses have an interest in entering your market, or similarly, they are contemplating an acquisition that might land them in an adjacent geography (making your business a natural follow on). Also, international buyers continue to demonstrate the ability to execute acquisitions in the U.S. and make fantastic strategic partners. In this sense, it is immensely beneficial to work with an advisor who has national and international relationships in your industry, and will expand the sale process geographically.
An experienced investment banker will change the trajectory of your business sale, introduce you to the right strategic buyers, and best position your business in the market to maximize value.
Including the right strategic buyers not only increases the likelihood of a successful transaction at a premium valuation, but also increases competition and drives up value across the buyer universe.