We’ve all been reading about the unprecedented demand for acquisitions on the part of private equity firms and corporate buyers. For the former, nearly $1 trillion of “dry powder” and persistent low interest rates have created a feeding frenzy to find the next deal. Strategic buyers, after years of right sizing their business and re-evaluating their cost structure, are now looking to increase revenue, and realize that a prudent acquisition program may be the most efficient means to get there.
This has led to a barrage of incoming calls to business owners with solicitations to buy their company. While any interest can be flattering and the potential riches intoxicating, there are solid reasons to give them the Heisman, and not all are obvious.
Bear in mind that when PE firms approach you, they are typically shooting in the dark. They may have read or heard about you in the trade press, but odds are their perception of you is distorted. Much like blind dating before Tinder. And if the person calling is 25 years old, don’t bother expending any energy on blushing…their job is to troll for fish, hoping to snare a 500 pound tuna. Before spending a lot of time and effort with a prospective acquirer, it will pay to do a simple diagnosis of your situation. As a minimum, you should assess the following:
- How ready is your company? Despite the flattery, PE firms are allergic to companies that don’t have systems and processes in place that optimize the company’s ability to deliver its offerings. This includes a CRM system to manage sales and marketing, some level of ERP system for operations, and financial statements beyond a Quickbooks printout. Your company’s systems don’t need to be state-of-the art (indeed, PE firms pride themselves on bringing efficiency gains to their companies), but if your CRM is still on ACT 2.0, your suitors will move on after the first dance.
- How much customer concentration do you have? A strategic buyer is more willing to accept a target that has a few large customers comprising most of its business because the concentration is diluted in a combination. PE firms by and large head for the hills.
- How deep is your bench? What would happen if you are hit by the proverbial bus? Try to institutionalize your knowledge throughout the management team so a buyer won’t be spooked if you look left while crossing the street in London. That may entail adding more talent to the squad.
- Is the culture a fit? Most business owners who sell have a deep concern for the ongoing welfare and happiness of their employees, regardless of whether they are personally moving on. If your instincts tell you that your team will not thrive under the new world order, you may want to broaden your discussions to include other potential buyers.
- Has the buyer made acquisitions before? If not, then save yourself for one who has. A bit severe, perhaps, but all too often novice buyers become runaway brides at the altar.
- Can you move on? This may be the hardest assessment of all. At our firm, we occasionally come across business owners who can’t fathom a life after the sale and plan to go out in a box. Their persona is so tied up in the company that they will be miserable without it. If this describes you, you may be better served by developing your management team to give them the wherewithal to take your place and a plan to assure a smooth transition.
The M&A market is as robust as it has ever been for middle market companies. Leverage has shifted to sellers like never before, as current earnings multiples exemplify. Nevertheless, be careful not to spend valuable time courting until you and your company are ready. The market may not be as ebullient as it is today, but your chances for a successful closing will improve immeasurably.
About Berkery Noyes
Berkery Noyes is an independent investment bank that provides M&A advisory and financial consulting services to middle market companies in the information and technology industries. The firm offers skilled transaction management to publicly traded and privately held businesses and private equity groups in both sell-side and buy-side transactions. Berkery Noyes has managed over 500 transactions, ranging from several million to more than four billion dollars in value.
About Martin Magida
Martin Magida is a Managing Director at Berkery Noyes, where he primarily assists clients with raising growth capital in the debt and equity markets. He also provides M&A advisory services to companies throughout the middle market. Martin holds a BA in Political Science from Union College and an MBA in Finance from the Leonard N. Stern School of Business at New York University, and is a Chartered Financial Analyst.