The last email asked the question “Are you a convincing seller?” In other words, does the owner have a well considered reason for selling their company, is serious and motivated, and understands the effort that it will take to sell the company? This email will address the question regarding what type of buyer the owner is seeking. The owner will often be asked just this question. Like the “why” question, the “what type of buyer” question will be indicative of the owner’s thought process for considering the sale of their business.
The flip answer to the “what type of buyer” question of course is: “The buyer that will pay the highest price.” This buyer, or the so called “strategic buyer,” can broadly be defined to include companies that have a strong business rationale for considering the acquisition. Strong business rationales include: 1) acquiring new customers, new geographies, and new end markets, 2) acquiring complementary products and services, 3) acquiring technology and intellectual property, 4) backwardly integrating, 5) eliminating a competitor, 6) increasing leverage with customers and/or vendors, 7) consolidating production from the seller’s facility to the buyer’s facility to improve capacity utilization, and 8) leveraging the buyer’s overhead by reducing the seller’s overhead.
As is apparent in the foregoing list, selling a company to a strategic buyer includes a number of considerations. The first consideration is the risk associated with sharing even a modest amount of confidential information with a strategic buyer.
If the transaction does not close, has the strategic buyer learned anything that could damage the company? While nondisclosure agreements (“NDA’s” or “confidentiality agreements”) are universally signed, they can be difficult and costly to enforce. It is hard for the buyer to “un-remember” what they learned
The second consideration relates to the impact on the owner’s legacy. The sale of the company to a strategic buyer could result in changing the name of the company to the name of the buyer. Does this matter to the owner? In addition, for the buyer to justify the price and achieve a return, the buyer may need to shutter the company’s facility and terminate many of its employees. Is this an acceptable outcome for the owner?
In prior emails we addressed the third consideration, specifically, the owner’s role in the company post closing. If the strategic buyer plans to install its own management team and the owner wants to retire, then this is a good outcome. If the owner desires to work post closing, then these strategic buyers, even at the highest price, may not be the best buyers for the company.
In considering the list of buyer candidates, the owner needs to determine the relative importance of these outcomes compared with the potential sale price. Perhaps there is a subset of strategic buyers that values the company’s “brand,” needs the capabilities and capacity of the facility, and needs most of the employees, thus mitigating these risks while supporting a high sale price.
Rather than thinking about buyer candidates from the “what buyer will pay the highest price” perspective, owners can think about buyer candidates that will pay the highest price while addressing a number of non-financial objectives. These objectives include: 1) honors the legacy of the seller and their family; this can be particularly important for multi-generational businesses and businesses that are located in smaller communities where the company and its owner are tightly integrated into and important to the community; 2) values the business brand, 3) is flexible with respect to the owner’s desire to work/work term post closing, 4) seeks to retain management and employees and create growth opportunities for them post closing, and 5) will assist in taking the company to the next phase of its lifecycle by providing capital and additional resources and support. These buyer candidates can include private equity groups and corporate buyers that are seeking diversification.
Marketing a company to a group of buyer candidates that can address the foregoing objectives may result in a range of values that is lower than the strategic buyer range; however, the combination of price and the ability to address the non-financial objectives of the owner may result in a better overall outcome for the owner.
In conclusion, the owner needs to calibrate 1) the price that strategic buyers may offer compared to 2) the price that non-strategic buyers may offer together with the non-financial characteristics of the transaction in order to arrive at a decision that is the best outcome for the owner. The conclusion is entirely personal and the one that best meets the needs of the owner today, tomorrow and in the future.
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