EXIT STRATEGIES: Finding financial buyers

There are two major types of acquisitions: strategic and financial. The strategic buyer seeks out businesses which have underlying assets or competencies which the buyer can leverage to create significant revenue opportunities through the combined operations. They might be looking for products they can sell through their own distribution channels or for underlying intellectual property which they can utilise in a wider business.

The other type of buyer is a financial or investment buyer who is buying a business to receive the profit benefits of that business, often without consideration of any synergies which might be gained through integration or central administration. It is this latter type of buyer which is the focus of this chapter.

Financial sales can still have some synergistic benefits for the buyer. Some financial buyers seek acquisitions because they are consolidating a number of similar businesses where the aim is to build cumulative capacity in terms of revenue. The synergy in the consolidated business comes through economies of scale. In this situation, it is very difficult for the selling firm to achieve a premium unless they are a key firm in the industry and their acquisition can convince others to join the consolidated entity.

Alternatively, they could have some management processes which can take additional costs out of the combined entity. However, since the dominant benefits come from the inherent revenue and profit generated by the acquired business, this is still regarded as a financial sale.

Businesses which are valued at under $2 million are often purchased by individuals. These might be people with inherited wealth or have come into a windfall through a lottery or insurance payout or have received a redundancy payment or golden handshake on leaving their prior employment. They may also be retired and looking for somewhere to invest their funds. While some may have come from the same industry as the vendor, many will simply be looking for a business to buy. Most often they will be working with a local professional firm or business broker.

Larger businesses are normally purchased by companies looking to expand or investment funds or trusts seeking a good investment for their funds. Business buyers for larger businesses will normally work through a larger professional firm or investment bank. The majority of buyers for larger businesses come from companies which are already in the same industry. They may be seeking to expand vertically by buying a supplier or customer or horizontally by buying a similar business. If it is not a strategic acquisition in an unrelated industry, they can still gain synergies from economies of scale in administration and central services, but they prefer to buy businesses in industries which they understand.

A vendor is normally in a much better position to influence the sale process if they already have some knowledge of the buyer. The vendor may already have some knowledge of prior acquisitions which the potential buyer has undertaken and therefore know how they treated prior owners and acquired staff and they may also know how well the acquisitions turned out.

Clearly, as a seller, you would prefer to deal with a company which had a good track record of acquisitions. Contact may be able to be made some time in advance of actually deciding to sell, thus allowing the potential buyer to know that a future sale is possible. This then puts your business on their acquisition map and allows them to start thinking about how to best take advantage of the potential opportunity.

Once a potential acquisition is registered with a sophisticated acquirer, they undertake some level of investigation into the business, its products, its customers and management. They start to accumulate information about the business for future reference. Often they will take steps to build an informal relationship with senior management to get to know them, to begin understanding their business culture and their future career objectives. These discussions often occur at industry functions, charity events and local public celebrations.

Somewhat open discussions have a considerable advantage for both sides. The potential buyer is given notice that a related business might be coming onto the market and can do some preliminary investigation to see if they are interested. This will later greatly speed up the due diligence process. On the other hand, the vendor is building up interest, hopefully across a number of potential buyers, so that when they want to sell, they can quickly set up a bidding process.

Even smaller firms can benefit by promoting their business within their region and in their industry to executives who might be looking to run their own business. Thus active participation in the industry association, local business development activities and local charities, will bring the business owner into contact with a network of potential buyers. At some point, the owner will need to indicate that he or she is interested in retiring or selling, but this can be done without putting pressure on the business or without indicating that the business is in a fire sale.

There are a number of guidelines and questions which can be used to identify likely buyers:

• Who has a similar business and has expansion objectives?
• Which companies in my sector have recently undertaken acquisitions?
• Which companies in my industry have surplus cash?
• Which companies in my industry have announced a public listing?
• Which companies have recently announced a consolidation program?
• Which companies have recently sold off part of their business?
• Establish contacts through recently sold businesses.
• Which businesses are similar to mine in different geographies?
• Who sells to the same customers I sell to?
• Who needs my people?
• Can I sell out to my managers and/or employees?
• Are there industry executives retiring who might buy?
• Are there industry executives being made redundant who might buy?
• Use your networks.
• Use the broker networks and ‘Businesses for Sale’ magazines.

Who has a similar business and has expansion objectives?

Often there are companies within an industry which are aggressively expanding. Some companies have a desire for growth, have the management team willing to put the energy in to expand and manage multiple businesses across several locations and have access to finance to execute expansion plans.

Often they have a strong competitive position, are achieving above average profits and are using these to fuel an expansion strategy. They may be backed by a wealthy individual or a private equity firm or be publicly listed and have access to the funds for acquisitions.

While they are seeking profitable firms, they also bring greater scale to the acquisition and can often generate additional profits through more economical central services, better procurement, more sophisticated internal systems and more experienced management. They will often have mapped out the industry and identified potential acquisitions and be actively working with professional advisors on current acquisitions.

The good news for the vendor is that these firms are relatively easy to find as their acquisition activities are openly known within the industry and to the established professional advisors. Thus an approach can be made directly or through a professional advisory firm indicating your interest in a future transaction.