Bringing in the Right Buyer for Your Business
Where do you find the best buyer for your company? As in any other business activity, you can work your own networks to track down the perfect buyer, either through your existing network in your industry or through investors and other channels. Once you get the word out that your business is on the block, deal opportunities start to flow in. The clearer you can be about what makes your business attractive, the more qualified buyers you will find.
You want to start with accounting firms, business brokers, investment bankers, and lawyers with whom you have worked, particularly those with knowledge of your industry. Some can even help you refine your approach to the sale at the same time they are connecting you with potential buyers. They will be in touch with buyers who are looking for opportunities. Each of these sources of deal opportunities has different strengths and motivations for helping you in your search:
Business brokers. Business brokers are the matchmakers of business world. As the young daughters of Tevye in Fiddler on the Roof discover, however, sometimes these matches are not "the perfect match." If you want to market your business without paying any fee, brokers are your choice. The buyer pays the fee. In a certain sense, you get what you pay for.
Brokers perform functions similar to investment banking M&A departments but focus primarily on much smaller companies (generally below $50 million revenues). Brokers provide little or no service beyond pure brokerage-bringing buyer and seller together and collecting a fee. They are generally small or one-person firms with no research coverage or other investment banking services. Typically, larger firms will seek out a full-service investment bank that will be able to provide research and analysis.
Business brokers typically cold call family-held private companies, and get the owner on the line. They tell the owner they represent buyers interested in companies such as theirs and ask if the owner is interested in discussing a sale. If the owner says no, they are off to the next lead. If the owner says anything that sounds directionally like yes, the broker has a fish on the line. He then calls a handful of potential buyers, normally private equity firms, to say the company is available for sale. When these potential buyers sign a fee agreement, the broker sends them information about the company, and the introduction is made. The broker collects the fee if a sale is consummated in the next year. The broker will normally attend the first meeting or two, but in general the heavy lifting on the deal will be up to you.
Given this process, it is easy to see that many of the businesses offered through brokers are not seriously for sale. Owners have nothing to lose, and so they may test the waters to find out about the sale process and see what their business might be worth. As a buyer, I've sat through many lunches with these tire kickers only to find that they have no intention of ever parting with their companies. Maybe if they could receive three times what the business is worth, they might think about it. As a seller, if you go through a broker, realize that you have done nothing to signal to the buyer that you are serious about nailing down a deal. In fact, using a broker signals just the opposite. Assuming you are not a tire kicker, you need to do everything in your power to let potential buyers know you are serious about selling.
And even though you might not pay anything up front for a broker's services, you could end up paying in the long run. Buyers generally factor the broker fee into their offering price. So when you are weighing using a broker against the expense of an investment banker, don't let price be the primary factor in your decision.
Brokers are sometimes characterized as the used car salesmen of the deal business because they do almost no work in qualifying the buyer or seller. Without checking under the hood, they get the business on the lot and work hard to move it off again. If you have a great business, you'll probably have lots of interest even without a broker. With these caveats, however, brokers can be an important source of buyers that are worth looking at. You can sometimes sell your car on the used car lot and take home the cash! Brokers can sometimes play a very valuable role in bringing buyers and sellers together. In its early days, KKR bought several companies from a business broker in Los Angeles named Harry Roman. Harry did very well, and KKR built the foundation for its empire on these early business-broker opportunities.
Accounting and Law Firms. For most business owners contemplating a sale, the first two people who will hear about it are the company's accountant and lawyer. They might know of potential buyers. Of course, you can also look beyond your own accountants and lawyers to contact other firms that serve the same industry. As close tax advisers to business owners through their auditing and consulting practices, accounting firms may have a direct line on other companies in an industry or buyers looking for opportunities in a particular area.
When contacting an accounting firm, start by searching out audit partners and M&A partners. Most firms now have highly specialized groups in areas such as technology or retail, so be sure to locate the group that specializes in your industry. In addition to the industry experts, the M&A group will see many potential deals. Contact them next. If you close a deal based on a referral from an accounting firm, you need to find a way to compensate them. Often an advisory fee is acceptable, but more often the best reward is post-transaction audit work. If you need an auditor anyway, hiring the firm that made the suggestion makes sense.
Law firms are generally not a prolific source of contacts with potential buyers, but they occasionally can be, and are therefore worth contacting. Seek out the partners in the firms who focus on corporate work such as securities law and financing issues. If they refer you to a successful deal, you should find a way to compensate them in fees and follow-up legal work for their firm (with the caveat discussed earlier that you need to hire advisers who have experience in the type of deal you are putting together).
Consulting Firms. Because consulting firms are also in close contact with senior executives at large corporations, they can be a good source of leads on potential buyers for your firm. Some large firms such as Bain have set up their own successful private equity groups. Smaller, niche-oriented firms may also have contacts with potential buyers. When approaching consulting firms, contact people as senior in the firm as possible, use personal introductions where you can, and target people in your area of interest.
Investment Bankers. Once involved in the sale process, investment bankers can be a great source of potential buyers. An investment banker who is well versed in your industry will know the heads of corporate development and professionals doing deals for large corporations. The investment banker would know who would be looking to purchase a firm like yours, and the decision makers who can make it happen. This can help you cut to the chase in putting a deal together at a company where you might have trouble getting past the secretaries. They know who really wants to do deals in this space. This is why hiring an investment banker, particularly if you are setting up an auction, can save you a lot of money and time in the long run.
All investment banking firms have specialty groups that focus on specific industries. Be sure to get in front of the group that is focused on your part of the world. Some of them may be working with buyers that are looking for opportunities in your industry. The primary motivation of an investment banker to work with you is the collection of fees from buyers derived from the completion of the transactions. Fees vary widely depending upon the financing or nature of the transaction, but net closing fees usually range between 1 and 2 percent, depending upon the size of the deal.
Also, while you're there, be sure to ask them for their research in the industry you're looking at. They'll give it to you. Further, ask to be put on their research mailing list for paper and electronic distribution. They'll often do it, and it will be extremely valuable to you, now and in the future. They are very busy, so you will likely not get much time with them unless you have a personal relationship.
Active and Retired Senior Executives. Other executives in your industry are often a good source of opportunities. Even former executives continue to be well connected and usually have fewer conflicts in recommending potential buyers. Use your networks in the industry, and ask your contacts for suggestions of other executives to talk with about potential buyers. This can be a great source of inside information specifically targeted to your business area.
Industry Associations. Industry trade publications and trade shows also could be a source of potential buyers. You are probably looking at these anyway, but you might see them through new eyes now that you have a business to sell. If not, go on their websites to see when and where the leading trade shows take place and learn the names of the leading trade publications. You'll make contacts that could lead you to buyers. You might also look to the trade publications and trade shows of your customers and suppliers.
So far, we've rounded up the usual suspects. These are the buyers that are most likely to purchase your business. But the universe is filled with possibilities, so don't be afraid to look a little further out. Particularly if you are having trouble coming up with a strong pool of buyers, you might need to think more creatively about potential buyers.
This is where your banker's contacts may come in especially handy. In some circumstances, for example, there may be foreign or domestic corporations that are simply looking to acquire a new line of business as a way to diversify their holdings. They could be building an old-line conglomerate, and your business may fit into their puzzle somewhere. While the building of conglomerates is less in vogue, it still happens. It will normally be your banker who has broad enough contacts to know about corporations pursuing a new direction, which can present such an opportunity. There also may be companies that are engaged in some kind of strategic diversification that could make them a potential buyer for your business, even if they are not a current supplier or customer in your current value chain. For example, a print publishing business might seek to acquire an online publishing firm for strategic reasons. An investment banker can be the best place to make such creative leaps across traditional boundaries. However, you too might think more broadly about what types of businesses, related or unrelated, could find your business valuable.
Finally, there are many individuals with very high net worth, who are looking to acquire companies or positions in companies. Like the corporate buyers above, these folks are normally not easy to identify, but they are out there. They often have hired bankers or accountants to help track down deals, and they may have idiosyncratic patterns of investing, so that is another good reason to be out there networking.
Sell Your Business Your Way © 2006 Rick Rickertsen. Published by AMACOM Books,www.amacombooks.org a division of The American Management Association, 1601 Broadway, New York, NY 10019.All rights reserved.