The question “Is there anyone out there that would want to buy my business?” crosses every business owner’s mind at some point. An owner typically has three paths to choose from as they begin to consider the right buyer for their business: internally, which includes debt recapitalization, selling to family, management, co-owner(s), or the employees (via an ESOP); externally, which includes selling to either a financial or strategic outside third party buyer; or a hybrid approach, consisting of both channels completed in multiple transactions, normally over a period of five to seven years.
If realizing the highest sales price is at the top of your list of priorities, then selecting the external path typically provides the greatest value for an owner as insiders don’t have the same level of financial resources available to them as external buyers do. Furthermore, strategic buyers typically can justify the highest price as the planned synergies provide a benefit stream not available to the other buyers.
Identifying Best Buyers
Positioning a company to be attractive to the best buyers is an important strategy to maximize value and obtain a premium valuation over normal industry standards. So, how do you begin identifying the best buyers? Mark Ostryn, CEO of Strategic Company Sales, has expertly summarized all of the questions that a business should ask to begin formulating this strategy and uncover prospective buyers for a business.
As a business owner, you should start by answering all of the above questions and then keep updating as you become more familiar with the marketplace or as events occur. This isn’t an easy exercise. To do it right could take months and then keeping it updated will require constant effort, especially if your company’s profile is most likely suited for an acquisition by another private company (versus a private equity buyer or a public company), as private company activity and data isn’t readily available.
Take an Offensive Approach
If you can’t answer some or all of the questions included in the matrix then here are some suggestions to equip you to do so:
- Attend your industry’s trade shows.
- Attain a leadership role with your industry’s association.
- Continually read industry news and other related business press.
- Join all of the appropriate LinkedIn groups and monitor activity.
- Begin a continuous dialog with common industry vendors.
- Subscribe to the newsletters of the merger and acquisition (M&A) advisors that specialize in your industry.
- Leverage your employees, trusted advisors and others within your network to feed you intelligence. You can position this as “market intelligence” for sales and marketing purposes so as not to disrupt your business.
- Engage an exit planner, investment banker or business broker to keep you apprised of the private equity and strategic buyer activity or to help with the overall process.
If you are willing to invest in this exercise and start the process far enough in advance (two to five years) it will provide the following valuable rewards:
- A leading indicator of the best time to sell the company for the highest multiple.
- Identifies the strategic value drivers buyers are seeking and allows the company to develop a strategy to build upon those attributes that would command a premium valuation.
- Positions the company to match the buyer’s sought-out strategic value drivers and also articulate its value proposition in an acquisition scenario.
- Creates a competitive auction environment with a number of competing buyers at the negotiating table.
- Helps assure your best buyers have been identified and aren’t missed when you go to market.
- Provides a leg up at the negotiation table because you have a deep understanding of your industry’s M&A market.
- Provides a head start for your investment banker in the preparation of a prospective buyers list.
I know you are extremely busy running and growing your business. There are many competing high priority initiatives that could be undertaken, but I would contend that dedicating time to this exercise on a continuous basis and far enough in advance can add equal or greater value than any other priority.