Do they like me? Are they going to call back? Did they think we were attractive? We are not talking about nerves following a first date, we are talking about finding a buyer for your business. When a business owner decides it is time to sell, the next thing they often wonder is “who will buy my business?” Many private business owners tend to underestimate the number of buyers who may have an interest in their company. They view buyers as scarce, and believe that few highly-interested buyers exist outside of close competitors and maybe that one private equity firm that reached out directly a few months back.
In reality, your business is the scarce asset, and there are often dozens, even hundreds, of buyers that would all be willing to compete aggressively to acquire it. Below are eight ways to attract the buyer who will best meet your objectives and value expectations as a seller (not just the buyer that is most readily available).
1. Don’t wait for a buyer to come to you; run a process to find the best buyers
Selling a business is very different from selling a house; putting a “for sale” sign in your yard and waiting for buyers to come to you may occasionally get the transaction done, but it almost certainly will not result in the best deal for the seller. A “proprietary deal”, where a buyer acquires a business directly from a seller (versus through a competitive sale process), is considered somewhat of a holy grail for private equity funds and other financial buyers. This is because it is well known on the buy-side that proprietary transactions are often completed at well-below-market valuations.
2. Talk to multiple buyers
You probably wouldn’t buy the first car you test drove, and most people don’t marry the first person they date. The same is true for buyers for your business; how can you know that you are talking to the best possible buyer if you never explored conversations with other potential buyers? Buyers know that it is in their best interest to isolate a seller, and they are often actively seeking “proprietary deals”, where a seller only engages with a single buyer. This is because buyers know that if their goal is to buy a business for the lowest price and on the best terms, the simplest way to do so is to isolate a seller and avoid competition.
3. Work with an investment banker that manages thousands of buyer relationships
An investment banker’s ability to guide a transaction to close is important, but equally important is their ability to offer a seller access to a broad universe of potential buyers. Investment bankers build and maintain close relationships with both financial and strategic buyers, many of which a seller may not be able to access or even know exist without the banker’s help. Whether a seller wants to contact ten or two hundred buyers, working with an investment banker capable of identifying and evaluating a broad universe of buyers will add significant value in the form of increased confidentiality, time saved, more favorable transaction terms, and ultimately, a higher purchase price.
4. Use detailed marketing materials that tell the business’s story
Buyers are shallow; they make a lot of judgments very quickly based on how your business looks at first glance. These judgments are often very difficult to override once they are made, and unfortunately, usually cost a seller money. It is critical that a business is introduced to potential buyers with marketing materials that are detailed enough to capture all the complexities of a business’s “story,” and not just how it appears on the surface. When a business owner sends nothing but a handful of financial statements to potential buyers, buyers immediately form their own opinions about that one down year, or that unusually high legal expense last year. Without presenting the correct story in a business’s marketing materials, buyers would not know that the down year was due to a freak hurricane that affected three top customers, or that the high legal costs were the result of securing a patent on a newly-developed proprietary process.
5. Highlight the company’s strengths
This one should be obvious; most business owners are well-versed in touting their company’s strengths. Presenting these strengths correctly to buyers, however, can be more difficult. When the aim is maximizing value, it is often more important to highlight what a buyer wants to buy, versus what the seller is selling. The strategic buyer in desperate need of manufacturing capacity will find value in different aspects of the business, compared to the private equity group looking to rapidly grow EBITDA. It is important to tailor the presentation of the business’s strengths depending on which buyer you are talking to.
6. DON’T try to conceal the company’s weaknesses
Just like it would be hard for a garbage man to sustain a marriage pretending to be an astronaut, it is very unlikely that a transaction will be successful without a buyer uncovering all of a business’s challenges. Due diligence in today’s transactions is very, very extensive and involves experts in a variety of fields pouring over every detail for two to three months. If there is an issue, it will be found, and it will cost the seller more if it comes to light late in a transaction. Instead, it’s better to disclose issues such as customer concentration, single-source suppliers, management gaps, or terminating accounts to buyers early in a sale process. Your investment banker can work with you to craft commentary around any challenges, which can help mitigate buyers’ concerns and reduce/eliminate the impact on value.
7. Know what you are looking for in a buyer
Seller’s typically have objectives outside of purchase price when selling their business. These objectives could include keeping a plant open, retaining employees, or allowing the seller to reinvest in the business. What defines a “best” buyer will vary considerably depending on a seller’s objectives. It is important for a seller to understand his/her objectives, and target the buyers that are most likely to meet them.
8. Choose advisors who will target buyers who best meet your objectives, not theirs
If you want to reach the best possible buyer for your business, working with a skilled M&A advisor with broad buyer relationships is critical. It is also critical to find an advisor that will use those relationships in your best interest. Your investment banker should work first and foremost for you, the seller. That means targeting the buyers that best meet your objectives, not the buyers who the banker owes a favor, or who may have a reciprocal sale assignment for the banker in exchange. Investment banks with limited geographic reach, or that sell primarily for/to private equity funds, may run into conflicts of interest in situations where the best buyers for their client fall outside of their limited circle of favored buyers.
Overall, finding the best buyer for your business is less about attracting, and more about targeting. An active, competitive sale process that includes a broad base of potential buyers is the most effective way to find the buyer for your business that will best meet your objectives. If you are considering a sale of your business, TKO Miller can provide additional insight on your buyer universe, and help position your business as an attractive asset to potential buyers in the market.