A key task that must be completed early in the sale process is developing a buyer list. However, compiling a list of qualified buyers is more complex than it may seem. Many sellers choose to take a scattershot approach to building their buyer list — specifically contacting any and every buyer candidate that may have even a remote or tangential interest in the acquisition opportunity. This approach could include contacting literally hundreds of buyer candidates. However, this approach may not be the best approach. A better approach would be to create a “targeted” list of buyer candidates, specifically, buyer candidates that appear to have a legitimate reason to consider the acquisition opportunity. This approach could include contacting perhaps 10 to 100 buyer candidates. Of course, one never knows at the start of a sale process how the ultimate buyer may be identified. However, it is important for sellers to connect with potential buyers that are a good “fit” (whatever that means) for their company; in other words, a buyer that is more than just a “warm body.”
So how should a seller go about the task of constructing a buyer list? For starters, it is important for sellers to consider their objectives for the sale. Obviously, achieving the best price and terms is of paramount importance. However, sellers should also ask themselves what they are trying to accomplish as a result of the sale. Do they want to leave a legacy? Is the goal to provide continuity for their employees by preserving the company’s values and culture post-close? Does the seller want to maintain their brand and/or local presence? Sellers should also consider how involved they would like to be with the company post-close — do they want to continue to have a role at the company post-close or do they want to walk away once the sale is complete? The answers to these vital questions can help determine which buyers are ultimately included on the buyer list.
As for where to obtain buyer information, investment bankers use a variety of resources to prepare a buyer list, including proprietary, in-house databases; their existing industry connections; private equity and fund sectors; business networks and associations; and commercially available databases, some of which can contain as many as 15 million buyer candidates worldwide. Such databases allow for searches by a wide variety of buyer criteria. More on this below. Again, the seller’s objectives will help to determine the search criteria a banker utilizes to construct the buyer list.
What are the different types of buyer candidates? Buyer candidates may include strategic buyers (public or private companies), Private Equity Groups (PEGs), family offices, and individual buyers, to name a few. Depending on the company for sale, these buyer candidates may be located anywhere in the world. Sellers should keep in mind that the buyer list is a living document. In fact, unless the sale is highly targeted to one or two strategic buyer candidates, for example, it is nearly impossible to identify all prospective buyers before engaging in the sale process. Sometimes, for instance, PEGs that decline to pursue the acquisition may recommend potential buyer candidates that they believe may be interested in the opportunity.
In addition, it is important for sellers to understand that the market is highly segmented. Put another way, companies and situations must match a very specific set of criteria in order for certain buyers to consider the opportunity. Buyer preferences are nearly as varied and diverse as the buyers themselves. In fact, M&A buyers’ preferences can be likened to the investing styles of public company investors. Growth-oriented investors like the stocks of high-flying, fast-growing companies, for example, while value investors prefer to buy the stocks of older, more mature companies that may be out of favor, but can be purchased at a bargain price. Their preferences are very distinct, so the likelihood of growth investors buying value stocks is slim, and vice versa.
In the M&A world, buyers also stick very close to an established set of criteria, which may include companies that:
- are a specific size, or are in a targeted range for earnings before interest, taxes, depreciation and amortization (EBITDA)
- have minimum gross and/or EBITDA margins
- are based in a particular geographic location
- operate in certain industry segments
- operate in consolidated or fragmented markets
- are turnarounds vs. healthy situations, or vice versa
- have specific capabilities and/or resources
- offer opportunities for a buyer to be an active operating partner post-close or, in the alternative, a passive investor
- have a strong management team in-place or would like to install their own senior leadership
- can serve as an add-on to an existing platform to bolster a buy-and-build strategy
While preparing the buyer list, it is also important to evaluate which buyer candidates have a history of making acquisitions, or determine which PEGs have recently been successful in a particular segment or industry, and thus, may be ready to dive back in and make another acquisition. Generally, it is important for prospective buyers to be acquisitive. If they are not acquisitive, or if they need to be convinced that a company is a good fit with their acquisition strategy and criteria, it is less likely that they will be willing to pay a market price (or higher) for that company.
Once the buyer list has been created, the seller and their team can convince themselves that they have an optimal list of buyer candidates, but for a variety of reasons, any number of prospective buyers on that list may not actually be “qualified” buyers. We like to say that the criteria for a buyer to be qualified is a three-legged stool: i) the buyer must be motivated, ii) the buyer must have the financial resources to consummate the transaction, and iii) the buyer must be knowledgeable about the opportunity. If any one of these three legs is missing, there is a high likelihood that the buyer in question is not a qualified buyer, let alone the right buyer. With that said, one never knows for sure if the buyer candidate is qualified or not until the seller approaches them to discuss the acquisition opportunity.
In the end, completing a successful sale comes down to finding the right fit for both the buyer and seller. That starts with constructing a strong list of buyer candidates. As such, the process of preparing the buyer list should be a thoughtful, well-organized exercise, with the goal of ensuring that the seller has a deep bench of qualified buyer candidates to consider instead of just a bunch of warm bodies. At the end of the day, it only takes one!
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