If I had a dollar for each time I heard that I would have well over 100 dollars! Not a lot of money, but it is a lot of business owners who get calls, emails, letters, and visitations from prospective acquirers, all saying the same thing. “I have a buyer for you Joe, and they will pay you top dollar for your business, interested?”
Now what? Should you take the call?
It’s natural, as a hard-working business owner, to want to hear from someone that says your business is worth a pretty penny. And if you are nearing retirement, you might be thinking about this very thing. What is the value of my business? And does this guy really have the money to buy it or just fishing for new business…?
As a result in this note, I want to briefly address one of the most burning questions you as a potential seller will have before you answer that call.
Who are the REAL prospective buyers for my business?
In general, below $10 million in annual sales is the Business Broker Market. If your business has sales between $10 million and $100 Million per year, your business is classified in the “lower middle market” of all size businesses. Above $100 million there is the “middle market” whose range extends from $100 million in annual sales to $500 million in annual sales. And above $500 million in sales is the “bulge-bracket” market. These are the larger private or public companies like the Dow 30 or S&P 500. This market is an entirely different world of mega buyers and sellers. And not likely to call you unsolicited to buy your business… But the other markets are each fair game for cold callers.
The reason these markets are broken down this way is mainly because bulge-bracket advisors like JP Morgan, or Goldman Sachs have a lot to choose from among higher end M&A transactions. As a result, there has been traditionally enough business for these big firms to slice the M&A market pie into smaller sub-market segments, like the middle and lower middle market ranges, and so on.
Nevertheless, in nearly each market segment the buyer “pool” is generally comprised of two types of buyers who are actively looking to acquire your business. We call them Private Equity Groups (PEGs), and Strategics (industry competitors).
Let’s take a closer look at these two groups, and see what they want from you.
Private Equity Group Buyers, and what they want
Private Equity Group buyers are the more diverse of the two groups. These companies range in size, and target acquisitions based upon the size of their investment fund. These investment funds which can range from several hundred million to billions in investment capital. These funds are raised from various sources such as pension funds, endowments, public & private trusts, investor pools, and wealthy individuals who all commit to invest when a prospective seller appears on the scene.
Selling to a PEG is not the same as selling to a Strategic buyer. PEGs have to reach specific IRR returns to their investors generally over a 5-7 year period. This means that your business will need to meet specific profit and growth metrics before they will invest, ie) buy your company. This proforma approach to buying businesses as a result can be risky, especially if the PEG adds little more than money to the equation. Consequently, PEGs may not pay as much as a Strategic acquirer who knows the industry and can exploit synergies to save money or increase sales after they acquire your business.
Strategic Buyers, and what they want
Strategic buyers on the other hand want more customers, more operations, more products, services and profits, etc. These are the M&A transaction reports we hear about on the news regularly buying each other to grow vertically in the same industry. Strategic buyers may pay more for your business because they may see more ways to cut redundancies after combining your business with their business, and hence save money on the deal. Strategics may also be able to increase sales to your customers using their products & services. That in turn could also enable them to pay more for your business.
So whether these cold-callers are PEGs or Strategic buyers just know that these first-contact callers are merely fishing expeditions. They may say or even promise a host of possibilities to get you to say yes to a visit. But once you agree to a visit, you could get locked into believing anything is possible.
What to do when a Prospective buyer calls
If you get a cold call from a prospective buyer, tell them “no thanks, I’m not ready to sell my business at this time,” and hang up. This is the best way to preserve the value of your business. The reason not to engage any cold-caller (even when you’re ready to sell) is because it’s not a real market. It’s a guy fishing for a sale, and if you are not yet represented by an SEC/ FINRA licensed advisor like me, find one. These licensed pros may not only find more than one prospective buyer to compete for your business, but they may also likely negotiate a better deal with the buyer that finally does make the most sense to sell to.
Oftentimes sellers who don’t have seller representation are taken advantage of. For example. Let’s say you are a lower middle market company in the manufacturing industry and you agree to meet with a prospective buyer after a cold call. During the meeting you may even all agree on a purchase price. But soon after supplying the buyer with 3 past years of confidential financial and customer information, the buyer decides to reduce the offer price. Why did they do that? Because your sales were flat three years ago and that could be a risk. Now what? With no back-up offers, or no one to help find a back-up offer, you are left holding the bag, at which time many sellers find themselves boxed in and compelled to take the lower offer price. But there is a better way.
How to avoid the cold call trap
When the time does come to hire a professional to evaluate, prepare, and confidentially market your company to all the best prospective buyers, not just one or two, call me. As a licensed FINRA representative I can better help you navigate the complex world of middle market M&A transactions, and in turn potentially save you a lot of time & money preparing you and your business in the best way to the best buyers, for the best price… that’s what I do.
So when the time comes to consider taking a cold call from a prospective buyer of your business offering you pie in the sky… Just say “No! I already called Rick Andrade, he’s our M&A guy.”