It is human nature to quickly establish a perception, a visceral reaction even, about a situation. In the transaction world, buyers quickly react to an acquisition opportunity based on their acquisition criteria, industry areas of interest, experiences and capabilities within certain industries, and the “pitch”. As such, the “pitch” to buyer candidates needs to be spot on to assure that the desired buyer candidates are in fact interested in learning more about the opportunity. While some of the pitch needs to be customized to each buyer candidate, there are many, almost universal, company characteristics that evoke the desired positive, visceral reaction.
When it comes preparing a company for sale then, owners should consider being mindful of these characteristics and direct their efforts and resources – where possible – to the actions that will maximize buyer perception. Of course, the reality of the opportunity must match the perception of the opportunity as borne out during diligence. With that said, there are specific actions owners can take (as described in prior posts) to maximize the market’s positive perception of their business and ensure that the perception matches the reality.
So what is the “pitch” or the merits that will evoke the most positive visceral reaction? The following lists 8 of these merits:
1. The company has audited financial statement (or reviewed financial statements) by a strong regional/local accounting firm – This fact creates the perception of credibility, professionalism, and strong financial and operational controls.
2. The company’s reported operating results are representative of its earnings and cash flow – Add-backs are objective and determinable, and the company is not managed to minimize taxes. In addition, the owner can provide an analysis of the company that is insightful and explains the company’s “true economics.”
3. The company has a strong management team – The company is not dependent on the owner or another “key man.” The company also has a quality, loyal employee base with low turnover.
4. Strong in-place infrastructure and controls that create the impression that the company is larger than it is and creates the perception of utmost professionalism – While larger companies are expected to have a strong infrastructure, smaller companies often do not.
5. Blue chip customer base with minimal customer concentration; the company is important to its customers – The company has cultivated customers that are leaders in their industries, the business is not dependent on a few key customers, and the customers would have a difficult time replacing the company as a supplier.
6. The company is not dependent on one vendor for critical materials – In the alternative, the company has a strong relationship with the vendor and a long-term supply agreement in-place.
7. Strong knowledge of the company’s market, competition, and outlook – The company is able to use that knowledge to develop a strong competitive position as evidenced by a dominant/leading position in its market; management also understands where the company is headed in the future based on this understanding as well as learning from the past.
8. Have a view of the future as demonstrated by an annual budget and multi-year projection – The budget/projection fits together with a compelling business plan and narrative; the budget/projection process is also a routine management function that is undertaken annually.
The common thread among of all of the foregoing “merits” is that they mitigate risk. As the number of merits increases, the buyer’s confidence that the historical operating results can be replicated increases. After all, the buyer is purchasing futures; confidence in the ability to replicate the historical operating results in the future increases the valuation of the company. Of course, most companies will not be able to boast that they have every one of these characteristics; however, companies in which many of these characteristics are applicable will make a stronger first impression on buyer candidates. As a result, buyer candidates will perceive a lower level of risk in acquiring the company.
Here is an example of a strong pitch that achieved the goal of piquing the interest of our client, but eventually went awry: Five years ago, we were working with a buyer to acquire a company that we thought was the “holy grail” of deals. It was a large company, >$5 million of operating cash flow (EBITDA); its financial statements were audited; and the seller was not only a willing seller, but was willing to sell the company for book value. However, when we started due diligence, we learned that the financial statements were a smoke screen — the audited financial statements were not accurate — there were aged receivables and the company was manipulating reserves to create earnings, there was customer concentration, and there were supplier issues. A company and a deal that seemed so pristine and appealing on the surface – by way of the pitch — become unattractive in a hurry. The pitch grabbed our attention and created a terrific perception, but, when the shiny facade was removed, our “holy grail” turned out to be nothing but a rusted, leaky chalice.
The pitch, or merits, discussed in this post demonstrate to would-be buyers that the owner is running their company like a beautiful, tightly run yacht that is ship-shape, not a run-down, leaky tugboat badly in need of repair. The bottom line is that owners who plan and prepare for a sale in advance and who have made efforts to build solid “firewalls” around their business can make much of the pitch described above together with company-specific merits. These owners stand the best chance of making a great first impression on potential buyers and, ultimately, achieving their objectives for the sale.