Thursday 28 June 2012

I Have a Buyer for your Business

My previous post was about niche businesses and those owner-entrepreneurs wondering if there could be more than one buyer for their business.  There are other sectors that include many competitors.  Just within the IT sector I am thinking of Cisco resellers, Microsoft SharePoint or Dynamics shops, IT solutions companies focused on virtualization and cloud strategies.
Some M&A advisors will approach companies in these sectors and say “I have several buyers for your business.  In fact I know the CEO of ABC Co. and the CEO of XYZ Co., they are good friends of mine and they are keen to buy your business”.  Some business brokers will say they have 100’s of buyers ready to go BUT the likelihood that these are really strategic and actually able to acquire is very small.
So, how do you separate fact from fiction and secondly, how important are buyer relationships? 
Recently closed transactions in the space and client references from those deals (see veracap.com/experience/transactions and veracap.com/experience/testimonials) are verifiable evidence of capability and up-to-date market knowledge.
However, they should not be the only factor in choosing an investment banker to advise in the sale of a business.  Having done deals in a sector renders the mandate more efficient for the advisor by: (i) knowing up-to-date acquisition terms and pricing and (ii) the appetite and ability of potential buyers, but securing a number of desirable offers is ultimately what the seller is looking for.  To achieve that you need an advisor who will work tirelessly on your behalf, not just forward the first offer received and pressure the seller to take it.  You need a company champion who will spend the time, leave no stone unturned and who will fight for your best interest.  Having done deals in the sector may lead to short-cutting the process believing that certain companies are active buyers and others are not buyers at all. Such assumptions will limit the potential that could otherwise be achieved.
As I have noted several times, the best buyer is not likely to be a direct competitor (who could not pay a strong price if they were just interested in acquiring the customer base) but a “platform buyer”.  A platform buyer will be interested in the business for one of three reasons, its customers, its personnel, or its technology. Platform buyers are good buyers because they typically leave the existing assets in tact (brands, people) and usually bring a growth opportunity that allows them to pay a good price and provides the company sold with new opportunities.
So should buyer relationships drive your choice in investment bankers?  An advisor knowing a CEO who wants to buy your business (even if for argument’s sake that company is Cisco or Oracle – pick any leader in its space) does not guarantee a good price or even a good offer.  Only by going to market with an experienced advisor who (i) understands the business and has presented the opportunity strategically, (ii) conducts a thorough process and, (iii) has the time and interest to put your company first, can you secure the best price for your company.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

Friday 1 June 2012

Is There More Than One Buyer For My Business?

I have come across several niche businesses lately where they have received unsolicited interests from potential buyers and this leaves the owners wondering, are there any other buyers for my business?  Should I bother with hiring an agent and engaging in a process that could take many months to complete or take the bird in the hand?
If these companies were publicly traded there would be no question.  The board of directors of a public company would undoubtedly reject the first unsolicited offer and engage an investment bank to explore alternatives.  Assuming normal operating circumstances, a board would not fulfill its fiduciary duty if it accepted the first bid.  Due process would require at least an independent fairness opinion, but even this would not assure the shareholders that they will realize the highest share price in a transaction; only a thorough and diligent auction process can do that.
Back to the question at hand; could there be other buyers?  When a potential seller operates in a very specialized vertical with only several competitors - that may spread unfounded rumours of the company’s demise as soon as they hear of a possible transaction - it is tempting to go with the bird in the hand.  But, as I have noted several times, the best buyer is not likely to be a direct competitor.
The best buyer is likely to be a “platform buyer”.  A platform buyer will be interested in the business for one of three reasons, its customers, its personnel, or its technology.  As an example, we were engaged to sell a pattern recognition technology company in the field of product quality control.  This technology would scan a production line and “kick-out” products that did not meet certain criteria.  In this case, the ultimate buyer was the US defence department, who paid a strong premium for the business and then used the technology for facial recognition for national security purposes.  Who would have predicted that? ... but having approached large technology companies that also served defence contractors ultimately led to this outcome.
The point is, even if you feel that there are only one or two competitors that could potentially be interested in acquiring your company, we can likely find additional buyers that you have never thought of as per the example above.  It is extremely rare that we have not been able to source at least several expressions of interest for a company for sale.  In the end you only need two interested parties to create that competitive tension.
So what is a company to do?  Private companies, where owner-entrepreneurs own majority control can do as they please.  This is the luxury of owning a private company.  Company owners may not want the hassle of preparing a business for sale or they may feel the value being discussed is fair but, in the end, going to market with an experienced advisor is the only way to secure the best price for your company.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.