- 13 October 2022
- Michael McGrath
Recap
Having established that the odds are not great; that the potential buyer that knocks on a seller’s door is the most strategic acquirer for the business (Lesson #1). And that in any event, getting in the ring with a large corporate, without a clear strategy and some input is not optimal (Lesson #2). The question then becomes, if there are many more sellers than buyers in the Australian market in the next decade (Lesson #3), how do you find genuine strategic interest?
What does “Strategic” really mean?
The word strategic is the most overused word in the business lectionary by a mile! So, what do we mean by a strategic buyer? For a buyer to qualify as genuinely strategic:
- They must be active – somebody who is NOT currently active is not a buyer.
- They must be able to articulate what they are looking for and why? Without being prompted they must have a clear idea of what they are seeking and why. If they are stumbling here beware. If somebody says “we’ll look at anything,” that’s the wrong answer! Whilst they may look at anything, they certainly won’t buy anything.
- They must have a clear horizonal or vertical gain through ownership of your business. Or if they are a PE firm they must already be invested in the space. (Unless your business is big enough to qualify as a platform investment – the first move into a new area). Without this, you are unlikely to be keen on the price.
- They must have the money or have an already approved credit line with an institution. Doing a deal is hard enough without being told at the eleventh hour that they have funding issues!
- Ideally, they have acquired before, hopefully many times. Beware of the first-time buyer! They often get easily spooked and history suggests they can be very erratic.
If the interest is not genuinely strategic, then the price and terms normally reflect that. In many cases, a low price and extended terms mean that an owner is often better just running their business for another couple of years and then close it down. There is always the option of running the business under management; more on that in a future blog.
How to Find the Needle in the Haystack?
For a deal to be equitable you must secure genuine strategic interest. This involves some research. Its vital to understand the dynamics not just in your own vertical but in the allied verticals. You need to map out comprehensively:
- Who the players might be?
- Have they acquired before?
- What transactions have taken place?
- What was paid?
The result of this will be a comprehensive target list and the accompanying intelligence. You might need some help with this. That’s where a corporate advisor, with a good track record can be very useful (don’t be shy, call us). Our target lists can run to excess of 100 targets before we are done and sometimes many more!
Why so many?
There is unlikely to be more than 4-5 serious buyers on that list. The rule of thumb for us is that a well-researched list might surface 10% of initially qualified interest. This shrinks after further qualification to less than 5%. The trouble is, it’s impossible to pick the 5% without qualification.
Qualification
This is the key. If you retain nothing else from this short blog, remember this:
The approach to a target has nothing to do with the business being presented.
It’s simply about the target. Are they actively acquiring? And if so, what are they looking for? And why? That’s it.
If you can successfully secure that criteria from an active target, then that’s all you need to determine if there is a high-level match. If there is a match, then you have yourself somebody to add to a shortlist. You must resist the temptation to pitch your business without qualification. We call this premature pitching. People will entertain a pitch and they may even encourage you to tell them what you have but in 35 years and after over 500 done deals; we are yet to see anybody talked into buying a business which isn’t what they are looking for. This is a multi million-dollar transaction! We are not selling Mars Bars to somebody who might be a bit peckish.
The shortlist can then be revisited to qualify further. Your job is to whittle the list down to the genuine buyer/s who are going to solve a problem through the acquisition. The bigger the problem your business can solve (in other words the closer the fit to the buyers’ criteria), the more the buyer is likely to pay.
The process of qualifying the shortlist is beyond the scope of this blog although it does not involve immediately divulging identity in exchange for a signed confidentiality agreement.
Read about that here.
It will require the exchange of some redacted information. Beware of the target that insists on identity without seeking further clarification on the business features, against their criteria. Especially beware if they are competitors! Those who insist on identity early, rarely if ever buy the business.
Eventually you have a shortlist of 1-3. There you have the needle/s. Does it take time? Yes. Does it require patience and discipline? Yes. It’s like the story of the “Hare and the Tortoise”-lots of useless activity at the beginning might feel good but it’s the Tortoise who comes through. Selling a business is much more of a process than an event.
If you have questions, feel free to call me or one of my Partners.
Stay Safe and Good Luck!