This is a question we get all the time from business owners, and for many it is what keeps them from moving forward because most entrepreneurs have no idea how to find an optimal buyer for their businesses.
I have added the word “optimal” to this discussion because that is really the type of buyer you want to locate; a person(s) or entity that will give you the optimal deal for your business. That is, unless you are planning to either sell the company to your employees or your Cousin Larry with a 10-year note and the hope that you will get your monthly payments (plus interest if you can get it) for the next 120 months (a long time to hope).
An optimal buyer by definition is one with the following traits:
Clearly our definition of an optimal buyer eliminates quite a few sub-prime buyers such as your employees and Cousin Larry.
My first piece of advice to those looking for an optimal buyer: Hire an experienced M&A advisory firm to work for you on this project. Why? Because you have NO idea what you are getting yourself into in terms of time and effort required to close a deal with a buyer like this. Again, selling to your key associates or a relative is far easier in the short run. Finding and closing a deal with an optimal buyer takes time, effort, diligence, and hard work and that is if you use a professional firm to represent you like Generational Equity.
If you are unable (or unwilling) to use a firm, then the rest of this piece will focus on the idea of your efforts to find an optimal buyer on your own, without representation. It can be done but plan on spending at least 1,000 hours of time throughout a 9-month to 18-month period to do so. If you have the time available to make such an investment, then read on (if not, skip to the section marked – A Far Better Option).
The first thing you need to determine for this project is this: Why would buyers find your company attractive? The two most important features all buyers look for are consistent revenue growth AND expansion of earnings hapenning simultaneously.
Note: Far too many entrepreneurs focus on top-line growth at the expense of the bottom line. If your revenue is growing 20% annually but your margins are shrinking, you are buying revenue the wrong way.
For the sake of this discussion, I am going to assume that your business is growing nicely and your profit margins are solid.
Having made that assumption, we now must ask ourselves what features of this business are attractive enough for a buyer to pay you a premium? This is where it gets really tricky if you are not using an M&A advisory firm because most likely before taking you to market they will perform a complete evaluation on your business to determine its current market value and discern its “intangible assets,” those features that buyers are most interested in.
Since our base-line assumption is that you are on your own, here are a few features that you may be able to leverage into optimal buyer attention if your business has them:
These are just a few items that optimal buyers will at a minimum look for in an acquisition opportunity. Time and space do not allow me to list all of them.
Keep in mind that every business is unique. What makes your company distinctive may be completely different than any other company in your industry. Your job is to determine what those features are.
Once you have determined your company’s features that are attractive, the second key step in finding an optimal buyer is this: Find out who is actively acquiring and more importantly WHY they are acquiring. Again, this is a vital component that an M&A firm would bring to your process. Without one you will need to roll up your sleeves and do some research.
Yuck, research. Yep, the process most entrepreneurs loathe the most. After going with their “gut” for years in growing the business, they now have to access a part of their brain that hurts when used. I jest, but the truth is that unless you have a niece getting her MBA with access to a major business school’s research library, this is going to be the toughest part of the process for you.
Here are some suggestions. First, get actively involved in your regional and national trade association. Going to these meetings will often enable you to learn quite a bit about acquisition activity in your industry. Be careful though, you will need to keep your motives confidential as you conduct this primary research. Last thing you need is for your competitors to learn about what you are considering!
Secondly, subscribe to as many of your industry publications as you can. You may already do this. If so, now read them. Quite often these are good sources of information as well and can allow you to develop an idea of who is active in your industry.
Note: Be aware though that buyers from either of these sources will be “industry players” only. The sources usually will not fully address the myriad of strategic buyers that may be interested in your particular business that are outside of your industry. And they also do not typically cover equity firms, professional investors that often fly well under the radar as they make their acquisitions.
So how do you find these types of buyers? It is very difficult. You can certainly do Google searches and that will allow you to find many of them because press releases can be sent out after a deal closes. You should be able to find those. And once you locate a buyer that has made an acquisition(s) in your industry, you should also drill into their website and try to determine the answer to most important question: Why are they acquiring?
As you can see, unless you are a research junkie or an M&A deal maker with a rolodex full of names (or in the case of Generational Equity, a buyer database with over 34K registered buyers), finding an optimal buyer is a real challenge. Can it be overcome? Sure, if you are willing to invest the hours needed to determine why your firm should be acquired and by whom.
But we provide business owners with a far wiser course of action: a proven, successful track record of finding buyers for our clients. How do we do it? By hiring and developing skilled people, creating processes and procedures that work, and always listening to the desires of our clients.
Are we perfect? Far from it. As you can imagine the odds of closing a deal successfully are driven by many factors outside of our control (the most obvious being the true motivation of the business owner, i.e., are you truly a seller?). However, no M&A firm has closed more lower middle-market transactions than us over the past several years, according to Thomson Reuters.
If you want to truly locate an optimal buyer, contact us, attend one of our M&A seminars, and learn how we can help you reach your financial goals!
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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