M&A: How Buyers Think
If you’re a business broker – or a business owner considering selling – wouldn’t you like to know how buyers think? I know that that would have been a pretty good bit of knowledge to have when I got started!
Of course, how buyers think is a generalization insofar as all buyers are different. They have different needs, personalities and goals.
But our years in the trenches have provided a basic understanding of the issues that concern most buyers.
This post focuses more on buyers of businesses in the Lower Middle Market than buyers of Mom and Pop” businesses but buyers of those smaller businesses might benefit from a professional business broker – or seller – at least being aware of some of these issues.
But before we get started, let’s recall that there are two types of buyers in this space: strategic and financial. The latter, as I’m sure you can intuit, is focused on the financial performance and the history of and projections for the bottom line.
The former are focused more on how the acquisition will improve some aspect of the acquiring company’s market metrics – its market share; the depth and breadth of its line of products or services; its ability to leverage some intellectual property of the target company.
What Makes a Good Fit?
Strategic buyers generally look for opportunities in or near their existing space.
For example, a business that contracts with public entities such as cities, counties or states to maintain roads and other infrastructure might be interested in acquiring a manufacturer of safety equipment used in that work; concrete barricades, orange cones, mobile highway message boards, etc.
For a more direct example from our own files, we’re working with a network security company that provides the security protocols pertaining to healthcare providers as required by several U.S. laws . This company recognized that similar security issues and concerns exist in other industries, not least being the legal profession. They started looking for a tech company of some kind that had their proverbial foot in the door of law firms.
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to Value businesses.
Become a Professional Business Broker…
After some searching, we found a business that provided web sites, social media marketing and SEO optimization to the legal community. This provider’s clients were mostly small and mid-size law firms. As the network security company’s existing security offerings were directed at small and mid-size healthcare providers (large medical groups and hospitals – like large law firms – have their own in-house security teams), the target company’s client list was deemed ideal for the security company.
As an added benefit, the security company would be able to offer websites, social media and SEO to its existing healthcare client base and a deal was done!
A business owner thinking about selling could – theoretically – do this him- or herself. But why would they?
First, the work necessary to prepare a business for sale, the time required to develop the marketing program and materials, the need to approach competitors and the fallout from THAT process – to say nothing of valuing their business and negotiating with any potential buyers – all takes time away from running their business. And the more time away from the controls, the more likely the business will lose value.
But any business owner thinking of selling their own business to a strategic acquirer should think about this, first: Confidentiality
Unless you want word of your intentions to spread all over town and throughout your industry, confidentiality is crucial. How do you assure confidentiality? It’s simple; Hire a professional business broker to handle the undertaking.
A good business broker will, with your input, be able to develop a list of possible strategic buyers – targets for the broker’s marketing efforts and implement those efforts without anyone being able to identify the business seller’s business until a potential buyer has indicated a strong interest.
Management in the Trenches
Most strategic acquirers will want the sellers to stay with the business for some period of time – and usually longer than a brief transition period. And sellers need to know this.
It would not be unusual for the seller to be obligated by the purchase agreement to continue to run his company – now a division of the acquirer – for several years. A seller could conceivably benefit in such an instance through an earn out – a way for the seller to actually realize greater proceeds than a straight sale in which he heads of into the sunset 10 days after closing.
Professional business brokers – as part of a professional team assisting the seller – can explain and help structure such a deal. And, if you think about that scenario, you can see more clearly why confidentiality would be important to both buyer and seller.
The Bottom Line
If you’re a business broker working for a client to find a buyer for his or her business, what businesses would benefit by acquiring your client’s business.
We had a client that provided fire suppression inspections for public facilities that were required to have such inspections performed – and, if the inspection found any flaws, repaired – annually. We found the ideal buyer: a company that designed, built and installed fire suppression systems in hotels, convention centers and the like. A perfect strategic fit.
If you’re a business owner thinking of selling, find a professional business broker that understands not only the wisdom of strategic acquisitions but also the necessity of confidentiality. If you need help finding one, contact me. If there is a broker near you that has completed our training course – or one that specializes in your industry – we’ll connect you.
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.
Become a Professional Business Broker…
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!