In our blog we discuss many factors that should be considered prior to and during the sale of your business. One area we have not recently discussed is how to find a buyer for your business. All the tedious prep work is naught if you are unable to source the right buyer for your deal.
I believe that, in most cases, a broad auction is the correct route for many sellers who are seeking to maximize the value of a sale. This process is what I consider a “contact sport”. The objective is to get in contact with as many qualified buyers as possible and get a blind teaser in front of them. By increasing the number of potential suitors for your business, you can improve the chances of receiving a higher quality offer. It is worth mentioning that “higher quality” may be a bit subjective. In this post I am concentrating on maximizing the value of your company in a sale. Some business owners may look at other factors besides the price to determine what constitutes “higher quality”. Such other factors may include how existing staff will be treated, what the future plans for the company may be, and if the seller will be able to participate in the company post-sale. These topics should be considered on a case-by-case basis as personal preference will play an important role.
Numerous channels exist to help find a buyer for your company. The following are just a few that are worth noting.
1) The Direct Approach. This is one of my personal favorites. The direct approach starts with building a qualified list of potential buyers. This list could be built using your personal contacts, an industry published list, or an M&A specific database. Going with the direct approach requires some heavy lifting up front as you conduct detailed research to build your list. However, this is a more targeted version of the broad auction approach as you are only going after those potential buyers who have an interest in your industry. The objective is to get your blind teaser in front of qualified buyers who you have determined have the skill, desire, and funding to complete a transaction.
2) Intermediaries. Sometimes our personal list of contacts just isn’t enough and cold-calling investors can be a tedious process. That is where an intermediary can lend tremendous value. Intermediaries, such as investment bankers, lawyers, and other M&A professionals, can help make introductions to qualified buyers. If you do decide to go the intermediary route be sure the individual or firm you work with has a sufficiently long list of relevant contacts. For example, an investment banker with 10+ years of experience in the diagnostics industry likely has wonderful contacts. However, this may not be the best intermediary to work with when you go to sell your skateboard manufacturing company.
Prior to engaging an intermediary, it is necessary to understand their fee structure and if they work with other intermediaries. Some firms make it a practice not to work with other intermediaries. While fears of breaching confidentiality may be valid, completely excluding other intermediaries runs the risk of excluding someone who might have just the right contact for your deal. Discuss this option with your potential intermediary to figure out where their head is at and why on this subject. A clear understanding of the process and what will and will not be included helps avoid future disputes.
3) The Indirect Approach. If the direct approach mentioned above is a targeted, “rifle” approach, then the indirect approach could be categorized as a “shotgun” approach. Using this method involves posting your blind profile to various M&A social networks in the hopes it reaches the right audience. Various deal positing sites exist, and each comes with its pros and cons.
Similar to the intermediary approach, some firms employ the indirect approach and others do not. This will be another important discussion point if you elect to go the intermediary route. If your advisor mentions they post the blind profile to M&A social networks, this shouldn’t be viewed as the advisor trying to get out of work. It is simply one extra tool in the sell-side kit. This method may require additional effort to vet the investors that express interest and separate the serious inquiries from those that are simply kicking the tires. However, that is what you pay the advisor to do. Let them sift through the prospects and only introduce those they have interviewed and who are the best fit for your deal.
I believe that technology has enabled M&A advisors to reach a larger audience than ever before. Deal listing sites allow potential buyers and investors from all around the world to review an opportunity. I also acknowledge that no matter how much effort goes into list building, it is rather unlikely that you or I will be able to build a comprehensive list that includes every single potential buyer. It must also be acknowledged that sometimes an unlikely buyer may place the winning bid. By sticking solely to list building and the direct approach, you run the risk of missing the unlikely buyer.
I’ve discussed a few of the channels that can be leveraged when conducting a broad auction. I’d now like to address one of the largest criticisms of this approach: the increased risk of a breach in confidentiality.
Selling your business is a personal matter as much as it is a business decision. Should your employees or competitors find out you are for sale it could spell trouble. However, following some best practices can help mitigate this risk.
1) Provide a blind teaser when initially going out to market. This one-page document should be just enough information to entice a prospective buyer, but not enough detail is given to identify the company. Keep your name, slogans, and other identifiable information out of the teaser. If you are a niche player in the Seattle, WA widget development market you may even list your location as the Pacific Northwest to make it more difficult for a reader to identify your company.
2) Once prospective buyers have indicated interest in the blind teaser and they have been vetted by your advisor, get a non-disclosure agreement (NDA) in place prior to sharing any additional information.
3) Prior to entering a more thorough due diligence phase, ensure the buyer has submitted a Letter of Intent (LOI). Your advisor should have already confirmed the buyer’s interest, capability, and financial capacity to complete a transaction on mutually acceptable terms.
4) Finally, as the potential buyer goes through due diligence tactics, such as break fees and/or purchase price deposits, can be requested by the seller to compensate for risk that the deal is not completed.
While the above is not a definitive outline for running a proper process, it should begin to provide some insight as to how a broad auction can be managed to increase the opportunity for a successful deal while maintaining your company’s confidentiality.
To end this article, I’d like to remind our readers that finding the right buyer is like finding a needle in a haystack. Many factors can work for and against you during the sale of your company. Some of these factors you can control, others you cannot. One factor within your power to control is the process you run. Your teaser, CIM, and other investor presentation materials are important. However, before you even begin preparing these documents it is important to understand what type of process you will run. Who is on your deal team, what will each person do and when will they do it, what is the desired end result? These are questions you likely ask during your business development meetings. If you find that the answers are not as easy to come by when preparing for a sale, then it may be the right time to begin looking for an M&A advisor to assist with your transaction.