When it comes time to sell their company, most business owners will either “self-medicate” or hire an advisor like an investment bank. In either case, generating interest from several different potential buyers will create your best results – competition between buyers forces them to put their best foot forward. Having multiple bids will not only increase the ultimate purchase price for your business, it will also significantly increase the odds that your deal closes (if one buyer flakes out, there is another in the wings to take their place).
What types of buyers should I approach?
Buyers typically come in two (and a half) flavors. The first are purely financial buyers – these are generally private equity funds who invest capital on behalf of their limited partners (pension funds, endowments, insurance companies, high net worth individuals, etc.). Their goal is to buy businesses, grow them, and then sell them later at a profit. Family offices for high net worth families are also potential buyers which behave similarly to private equity firms (although they usually have a longer hold period for their investments).
The second type of buyer is a “strategic” buyer. A strategic buyer is another company in your industry or a related industry. Strategic buyers typically buy companies to expand their revenue base, geographic presence, product or service line, intellectual property, or employee base, or capture synergies from cutting costs from combining two different businesses.
A hybrid of these two types of buyers is a company that is owned by a private equity firm which has tasked the company with growth through acquisitions. In this case, the buyer will look and feel like a strategic buyer, but will have financial backing from a financial buyer.
How do you identify the right buyers to approach?
There are several different databases that catalog and classify private equity buyers by size of desired investment, target industries, and types of transactions. A reputable investment bank will have access to these databases. Using these databases, you can identify a sizable pool of potential financial buyers quickly.
Identifying strategic buyers is trickier – although there are several corporate databases, it is not always clear what types of businesses these companies would be interested in acquiring. In many cases, Google searches and industry research will be your best bet to identify the right potential buyers.
What do I need to do before I reach out to potential buyers?
Prior to reaching out to potential buyers, you or your investment banker will need to put materials together on your business (an executive summary that is sterilized to protect your company’s identity for distribution prior to signing a nondisclosure agreement, a confidential information memorandum that describes your business, and a data room populated with basic financial and other company information). You will use the sterilized executive summary in your attempts to reach out to potential buyers – this executive summary needs to tell enough of your story to get a buyer interested, but not so much information that it will be easy to determine that it is in fact your company (prior to the potential buyer signing a nondisclosure agreement).
How do I reach out to potential buyers?
Once you have these materials, you can use e-mail, phone calls and LinkedIn connections to make initial contact with potential buyers. Because private equity funds have staff dedicated to reviewing potential acquisitions and investments, they will typically respond the fastest with either a “yes, we are interested in learning more,” or “no, we are not interested” response. It might take a few attempts to finally make contact, but private equity firms typically respond. You should reach out to the private equity firm’s head of business development, or if the firm does not have that role, you can reach out to one or more of the partners.
Strategic buyers, on the other hand, are more challenging to contact. Often it is not clear who within the potential buyer’s organization is the right person to contact (CEO, CFO, Business Development leader, etc.). In general, if the company has a head of corporate development or a head of business development, that person is a good first place to start. Their role is to evaluate acquisitions or strategic relationships.
If after 3-4 attempts you have not gotten a response from the head of business development, reach out to the CEO, and then the CFO. If you have tried to contact each of these roles 7-8 times overall and you have not gotten a response, it is safe to say they are not interested and you can cross them off your list of potential buyers.
What is a typical response rate from a cold reach-out?
In our experience, you should hear back from 80-90% of private equity firms with their feedback (whether they are interested or not). For strategic buyers, you might hear back from only 30-60% of potential buyers, depending on the industry (some industries have more M&A activity, which tends to increase response rates). Investment bankers will get higher response rates from institutional investors than individuals because the buyers want to see additional deals from the investment bank – if they are not responsive, that might be the last time the investment bank presents a deal to them.
In order to maximize the response rate you get from potential buyers, the story in your executive summary needs to be compelling – private equity firms and strategic buyers get approached with over 2,000 new deals per year. Your story needs to stand out, so pay careful attention to your story and clearly articulate why a buyer needs to own your business.
A game of persistence
The process of reaching out to potential buyers is laborious – a successful process requires a lot of elbow grease and perseverance. It is likely very similar to what you experience in cold-calling for your company’s sales – it takes time, energy, discipline and persistence.
Once a buyer has expressed interest in your company, you should insist on executing a nondisclosure agreement prior to providing any additional information.
The views expressed represent the opinion of Class VI Partners. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. Class VI is a registered broker dealer, Member FINRA.
About the Author
Chris Younger is the Co-Founder and Managing Director for Class VI Partners, a financial services firm focused exclusively on business owners, and CoPilot Analytics, which develops applications and tools to help business owners drive more value in their business. Chris has more than 25 years’ experience in executive management, marketing, sales, law, and mergers and acquisitions. Chris was a co-founder and President of the nation’s largest provider of converged communications solutions, during which he led over 25 acquisitions and their subsequent integration. Previously, Chris was an associate with the law firm of Wilson, Sonsini, Goodrich, and Rosati in Silicon Valley, and clerked for the Honorable Jesse Eschbach of the U.S Court of Appeals, Seventh Circuit.
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