Know Your Buyer

There is talk about creating competitive tension, which is having more than one offer for a business. In my experience this may happen but it is not always the case.

So, before commencing the marketing of your business by research, it is as well to consider who a potential buyer of your business might be. It could serve you well.

The key to knowing who your buyer might be is to be able to identify where the benefits to you might be. These could be in the form of

• Paying a premium price for your business as it has products, services or customers who they do not have and would be glad of these connections.
• Your management team knows the buyer through previous dealings and so the integration of the two businesses after completion will be smooth.
• Add value to your business since the buyer has qualities you do not possess.
• Being able to take your business onto the next step as you do not have the desire to do this.
• Have a good understanding of your sector thus reducing the amount of commercial due diligence and saving you time and costs.

Consider these factors when identifying the potential buyer. For example, your business could provide a new geographical marketplace. Alternatively, your products or services could sit alongside theirs and they could use their marketing, selling and distribution channels as a result.

If you can identify more than one potential buyer, then with careful negotiation, the buyer may well be amenable to including some of their upside in the purchase price.

So where might these potential buyers be found?

Direct competitors are one source but be careful here. They may only be after some commercial knowledge of your business to advance theirs. Or, even let the “cat out oof the bag” before the deal is done.

There are other obvious pitfalls such as managers leaving, customers becoming nervous as they choose you above your competitor and reducing the price as they believe their alternative is to acquire your customers by price reductions or poaching key employees.

For example, I was involved in the sale of a company to a competitor. Both businesses knew each other well and respected the position of each other. That was the buyer was easily able to identify the parts of the seller’s business that would add to their core business while the seller recognised it was a sensible deal in relation to the other offers he had received.

Businesses in related sectors can be those who believe they should be growing their core business rather than diversifying. Your business maybe a good fit being an adjunct to the core. I have come across, for example, a bathroom supplier acquiring a kitchen supplier where a small premium price was paid for the shares.

So, being able to identify related sectors where these buyers may reside could be a useful exercise.

It is easy to forget the obvious, that is suppliers and customers. Whist vertical integration does not always deliver the value to the buyer as expected, there could be a case where your business accounts for a substantial proportion of the supplier’s sales. Alternative, a customer could see the opportunity to develop existing IP or technology and I have seen this in the pharma sector.

Initially, there is no need to discuss your business with them. No, look at their operations, where might there be opportunities and or weaknesses? Could your business position itself to help in those opportunities or mitigate the weaknesses.

Now we are able to attend trade shows so, take time to visit these. Have a look at your competitors and see where your chances might lie.

Moreover, how would your business culture and team fit in with theirs? It is not just about the numbers. How much integration will need to take place?

I recall at a conference in 2016, at the Institute of Chartered Accountants (ICAEW), Laurence Capron, Professor of strategy at the INSEAD Business School, said that although the risks were high for companies and average returns were very mixed for investors, acquisitions may be the only way to obtain new capabilities and “disruptive innovation.”

“At the end of the day, acquisitions remain a very powerful tool to grow your company” she said. “It is very unlikely today in dynamic industries or knowledge-intense industries that a firm can only grow with their own organic growth.”

Best-in-class acquirers balance organic growth with acquisitions, alliances and joint ventures, Capron explained. The biggest mistake is when acquisitions become the corporate strategy per se, instead of just one of many strategic tools.

So how do these thoughts impact on you as a seller of your business?

Most sellers start by wishing to maximise the value they receive for their business. This does not always turn out to be the case. So, knowing who your buyer is likely to be is one of the main factors which will influence the price and the chances of completing the transaction. Are you offering a dynamic and knowledge-intensive business? If so, how would it stand up to the due diligence the buyer is likely to undertake and be able to meet their financial criteria?

Bear in mind experienced corporate buyers tend to know what they are doing and have a significantly bigger chance of a successful merger since they ought to have built up the skills over time. In my experience, they have an acquisition timetable and if you miss that particular quarter than it could be another six months before you are back in the frame.

Indeed, this was the case with a sale I undertook several years ago. The client realised that they needed to strengthen one of their accounting functions to stand up to external scrutiny by the buyer to ensure consistency in income recognition. The sale was delayed by six months and although it did go ahead and did not affect the price to a great extent, it added a layer of uncertainty the buyer would not return.

A first-time buyer will not be so experienced. Similarly, there is a lower risk to a buyer of things going wrong where the acquisition is small by their standards. Deals described as “bolt-on” in fragmented markets can be integrated very quickly and effectively and so maybe less risky.

What do Entrepreneurs say?

Entrepreneurs and Private Equity whom I have worked with, especially those with MBAs, look at how they will leave the business and the returns they expect to make before they buy a business. That may sit with difficulty with you where you are emotionally attached to your business. It is though an unpleasant fact and given the options open to you may be the only route you can take.

Do you Know Your Buyer?

Knowing your buyer before the marketing process starts is something worth considering since a number of businesses are sold to buyers known to the seller. In some cases, I have dealt with it becomes more important to do the deal rather than to od the deal at the best price.