DealMakers - Q3 2019
Finding a buyer for your business
by Chris Staines
One of the most asked questions, when consi-dering the sale of a business, is how to find a suitable buyer. Quite naturally, the owner wants to consider all of his options to make sure that he will maximise the sale price.
He will also, most likely, be concerned about going to the more obvious candidates straight away, as this can often provide market information to competitors, which can be damaging. The owner will also be wary of alerting customers, suppliers or employees of an impending sale, and hence confidentiality whilst sounding out the market is paramount.
Included below are some of the options that the owner can consider, usually through an M&A advisor to add another layer of confidentiality, and some comments on the merits or otherwise of each.
Competitors looking to expand their product/market/team/profits etc
As mentioned above, often the most obvious candidate to buy your business is the one that can cause you the most problems in the marketplace. Competitors will naturally understand your business and the market you operate in, and also appreciate the value of your company – especially where such an acquisition delivers synergies that can boost combined profits.
Approaching competitors, however, can also have its downside – especially when a sale transaction does not proceed for whatever reason. Armed with the knowledge that your company is for sale, the competitor could use such information to their advantage, and without necessarily breaching a confidentiality agreement, and this must be considered before going down this route.
Companies looking to vertically integrate – up or down
Companies looking to vertically integrate might include your own suppliers looking to enhance the value of their product offering, or your own customers looking to include the profit margin from their own suppliers (such as you). Although not as common as a competitive buyer – in more recent times, companies have become wary of stepping out of their comfort zone – if such a buyer can be found then these generally are favoured over a pure competitor. Confidentiality, whilst still important, is less likely to be an issue as such buyers would be unlikely to want to damage an existing relationship.
Companies looking to enter a foreign market or get a national presence
Finding a buyer that is looking to enter your own marketplace can be extremely attractive, but you are probably going to need the services of an M&A advisor with a good international network to unearth such a company. Not only is confidentiality likely to be less of an issue, there is also the chance of a much higher multiple being applied to profits from, say, either a European or US buyer. On average, listed PEs are some 40% higher than South African PEs in these markets, and this disparity remains even when such PEs are discounted down to private company multiples.
High net worth individuals or teams
Another interesting group of buyers are those high net worth individuals or teams that have either their own money, or significant backing, and a desire to enter an industry such as yours. This often includes individuals with considerable business experience that is relevant to your industry, although this is not always a pre-requisite for some of these candidates. On the upside, confidentiality is much less likely to be an issue.
However, on the downside, you may not be able to negotiate the same exit value for your business as you might from a competitor desperate to get a strategic advantage, or an international company applying a higher multiple.
MBI teams are generally similar to high net worth individuals or teams, although they will typically have specific experience in your industry and also have the backing of either a VC or private equity firm (or occasionally private backer) rather than their own cash. The valuations arrived at from such teams are likely to be similar to the high net worth buyer.
Another favoured candidate in any sale is the company’s management themselves. Although unlikely to offer the best price for your business, the owner is often very keen to give management the option to buy the very business in which they have been working for a number of years. If this route is considered, the owner will probably need to provide some assistance to management to get an MBO done, either through guiding them towards a private equity firm that can provide some of the finance (and package the remainder from debt or other mezzanine or equity providers), and often through providing vendor finance to make up any shortfall (that is, leaving some of the consideration in the business, only to be paid out when cash flows allow).
Companies looking to do a roll-up (with PE backing)
Individuals or companies looking to do a roll-up are not particularly common, and will probably only be introduced to you through an M&A advisor. A roll-up is where an individual or company attempts to buy a number of similar or complementary businesses in a single industry, and then to combine them to extract operating synergies, usually ahead of a listing at a higher multiple. Prices here can generally be quite favourable, especially where the industry exhibits a good listed multiple, but these transactions can come with the added complications of the vendor now being part of a larger group prior to ultimate exit.
Companies forming related conglomerates
Similar to a roll-up above are companies looking to buy more loosely-related businesses – often with vertical integration being one of the aims. Such buyers are generally listed companies looking to achieve arbitrage between the private multiple they can offer, and the listed multiple that will then apply to the target’s profits. Synergies between operations can also extract additional profits to which the listed multiple can be applied. Valuation can therefore be as good as in a roll-up, and there is also the advantage of some of the consideration being available in listed shares with perhaps a good growth trajectory.
Private equity firms (not always 100%)
Private equity firms are always in the market to buy profitable, established private companies – often with the promise of bringing capital and their network to the table to greatly enhance value if an earn-out is part of the transaction. Whilst up-front consideration may not be as high as from other buyers, if the PE firm is as good as their word, the ultimate consideration that the owner receives can easily meet or exceed his expectations.
Apart from the potential buyers that can be found above, there are, of course, other options available to the vendor, such as:
a. Take in investment capital, grow the business and then exit at a later date (trade sale or listing)
b. Sell only the part of the business that buyers want, and retain the balance.
c. Go for a listing yourself.
When an owner is considering a sale of his business, there are often many more options than they might initially consider, and each with a different likely set of outcomes as regards value, confidentiality, and structure. It is important to match the right set of buyers with the owner’s own personal aspirations to ensure the best result.
Far too often, buyers approach M&A advisers when they themselves have been approached by a single buyer (often a competitor), and become committed to a deal before considering all the other options that might be available. It is far better to rather plan for an exit some months (or even years) before a sale transaction, and to define the non-negotiables required from any deal. This way, the owner can make sure that he only speaks to the kinds of buyers likely to deliver these non-negotiables, and also takes steps to pro-actively approach them when the time is right.
Needless to say, having multiple suitors for your business will undoubtedly lead to a better price than from dealing with one candidate alone, but to manage such a process takes considerable skill.
Staines is a Director, BDO Corporate Finance.