Interacting with prospective buyers can be an intimidating task for business owners who are new to the M&A process.
In my experience, the primary thing that buyers care about is not making a bad acquisition. Consequently, their initial focus will be both on whether the company is a good fit for their needs and what the significant down side risks of the opportunity are.
Therefore, your advisor will be asked a lot of questions about customer and vendor concentration, payment problems, litigation, and other potential risks. This is not because the buyer will ultimately focus on these issues, but rather because they are the sorts of issues that can cause a deal to turn “bad” down the road.
At this stage, you should expect to conduct a series of 45-60 minute calls with potential buyers. Despite the fact that your advisor will have provided acomprehensive financial and operational picture of your company in the book, buyers will want to hear the story directly from you. However, most experienced buyers should be willing to limit their review at this stage to a review of the book, discussions with your advisor, and a single call with you.
While some advisors might disagree, I generally do not price deals at this stage. Providing a price early assumes that you and your advisor understand the entire value that your company has to every buyer. Also, it assumes that every buyer will value your company at the same level. Both of these assumptions are unrealistic.
Instead of pricing a deal, your advisor (and you) should be conveying your company’s value propositions to potential buyers so that they can make their own decisions on the price they are willing to pay. While your company provides obvious benefits (products, revenue, etc.), there are often synergies that might be available to potential acquirers. Are there purchasing benefits? Cross-selling opportunities? Other synergies? These value propositions can increase a deal price greatly, but can’t always be anticipated. My best advice is to remain flexible and to listen to potential targets’ needs.
Indications of Interest
At the end of the first round of discussions (which can last for a month or two), you’ll want to separate the lookie loos from the serious buyers. I prefer to do this by requiring non-binding indications of interest. Indications of interest are usually one to three page letters introducing the buyer, describing its interest in your company, and setting out general valuation and deal parameters.
Frankly, indications of interest have virtually no real meaning, except that they require buyers to put in a little bit of work thinking about the company and its value. Consequently, they are a good way to separate the wheat from the chaff and decide who to include in a more thorough second round of discussions.
Your M&A advisor should analyze the indications of interest and make recommendations as to how many and which potential buyers to go forward with. I generally advise clients that four to six targets at this stage is a manageable number and usually allows a fair sampling of appropriate financial and strategic buyers, without overwhelming you at the next stage.
In collaboration with Vintage, PR Newswire’s regulatory compliance and investor relations division, Michael Schwerdtfeger is hosting a three-part webinar series that walks middle market business owners through the deal process. Details and pre-registration instructions are available here.Share: