One of the most asked questions when considering the sale of a business is how to find a suitable buyer. Naturally you want to consider all of your options to make sure that you maximise the sale price.
You’ll also most likely be concerned about going to the more obvious candidates straight away, as this can often provide market information to competitors that can be damaging.
You’ll also be wary of alerting customers, suppliers and employees of an impending sale, and hence confidentiality whilst sounding out the market is paramount.
Included below are some of the options that you can consider, usually through an M&A advisor to add another layer of confidentiality, and some comments on the merits or otherwise of each.
1. Competitors looking to expand product/market/team/profits
Often the most obvious candidate to buy your business is the one that can cause you the most problems in the market.
Competitors will 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 can also have its downside – especially when a sale transaction does not proceed.
Armed with the knowledge that your company is for sale, the competitor could use the information to their advantage, and without necessarily breaching a confidentiality agreement. This must be considered before going down this route.
2. Companies looking to vertically integrate – up or down
Companies looking to vertically integrate might include your suppliers looking to enhance the value of their product offering, or your customers looking to include the profit margin from their own suppliers. Although not as common as a competitive buyer, if such a buyer can be found they are generally favoured over a pure competitor. Confidentiality is less likely to be an issue as such buyers would not want to damage an existing relationship.
3. Companies looking to enter a foreign market or get a national presence
Finding a buyer that is looking to enter your market can be extremely attractive, but you may need the services of an M&A advisor with a good international network to unearth such a company.
Confidentiality is likely to be less of an issue, and a much higher multiple may be 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 PEs are discounted down to private company multiples.
4. High net worth individuals or teams
Another interesting group of buyers are 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.
On the upside, confidentiality is much less likely to be an issue. 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.
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5. Management buy-in (MBI) teams
MBI teams are similar to the above, although they will generally have specific experience in your industry and the support of either a VC or private equity (or occasionally private backer) rather than their own cash. Their valuations are likely to be similar to the high net worth buyer.
6. Management buy-out (MBO) teams
Another favoured candidate in any sale are the company’s management. Although unlikely to offer the best price for your business, the owner is often very keen to give management the option to buy the business they have been working in 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 by guiding them to a private equity firm that can provide some finance (and package the remainder from debt or other mezzanine or equity providers), or by providing vendor finance to make up any shortfall (that is, leaving some of the consideration in the business to be paid out when cash flows allow).
7. Companies looking to do a roll-up (with PE backing)
Individuals or companies looking to do a roll-up are not common, and probably will 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 an industry, and then combine them to extract operating synergies, usually ahead of a listing at a higher multiple.
Prices here can be quite favourable, especially where the industry exhibits a good listed multiple, but these transactions can come with the added complications of the vendor being part of a larger group prior to ultimate exit.
8. Companies forming related conglomerates
Similar to a roll-up are companies looking to buy more loosely related businesses — often with vertical integration as 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 be as good as in a roll-up, and there is the advantage of some of the consideration being available in listed shares with growth potential.
9. 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.
10. Other options
Apart from the potential buyers that can be found above, there are other options available, such as:
- Take in investment capital, grow the business and then exit at a later date (trade sale or listing)
- Sell part of the business that buyers want, and retain the rest.
- Go for a listing yourself.
As an owner considering the sale of your business, there are often many more options than you might initially consider — and each with a different set of outcomes as regards value, confidentiality, and structure. It’s important to match the right set of buyers with your aspirations to ensure the best result.
Far too often, buyers approach M&A advisers when they have been approached by a single buyer (often a competitor), and become committed to a deal before considering all other options.
It’s far better to plan for an exit months or years before a sale transaction, and define the non-negotiables required from any deal. This way, you can make sure that you only speak to buyers likely to deliver these non-negotiables, and pro-actively approach them when the time is right.
Needless to say, multiple suitors for your business will undoubtedly lead to a better price than one candidate, but to manage such a process takes considerable skill.