In a highly competitive sale process, the selling entrepreneur may be forgiven for thinking that the transaction resembles that of a dating service. Your M&A advisors (the dating agent) prepares your profile, and then offers it to the wider dating universe to attract interest. Those interested parties share their own profiles for the seller to consider before going on the first blind date, to determine whether there is merit in pursuing a longer relationship.
While M&A advisors may well take offence by such a flippant comparison, citing emphatically that their stressful work involves highly complex, multi-layered and emotionally-draining dynamics of equity transfer, there is however one important learning from such a contrast – being that both parties on the date are being mutually evaluated. It is perhaps easy to understand that after a blizzard of diligence questions and blurry of management presentations, why the seller may feel slightly defensive and feel as exposed as a display on the high-street shop window. The reality however is that for premium assets, buyers still need to show-case their credentials to shareholders in much the same way as the flirting dances of the Amazonian birds of paradise.
Buyers need to showcase their credentials to shareholders
This fact is sometimes lost on some buyers, who will expect the shareholders to have researched their background thoroughly and will readily assume due perhaps to their unique market position that they will be clearly recognised as the best option. Given that the shareholders will have been for the past 3 months juggling to both continue to drive business growth on top of the tidal wave of information request, this is indeed an unfair expectation, and reflects a lack of buyer recognition that (as with dating), a relationship will only develop where there is mutual attraction.
More experienced buyers will recognise the need to both introduce and show-case their credentials in an informative corporate presentation, in a bid to sway management into making them the preferred bidder. Such a practice is well- thought-out, since although the sales process will likely short-list the highest bidders, it is not uncommon for brokers to have an off-line chat with the preferred bidder (regardless of whether they have the highest bid) to see if they will raise their bid to an acceptable (not always highest) level.
Sellers need to prepare their own set of criteria for their buyer
While buyers will always approach a formal process with a standard list of questions, it is just as important for seller’s to develop their own key questions to allow them to assess which buyer best achieves their target criteria. These questions can broadly be split into “what is the buyer’s value proposition”, “buyer’s ability to transact” and “buyer’s post-completion integration”.
Questioning the buyer’s value proposition is effectively the dating-equivalent to asking what are you looking for in your future partner and why you think the relationship will work. It is invaluable for the buyer to better understand the investment case being planned and what the strategic vision is, to ensure that this aligns with their own.
Key questions to ask of your potential buyers
§ What is the key strategy behind the acquisition and how will you add value to the business? This question will force the buyer to set out their own equity story and allows the seller to finally turn-the-tables on the buyer to consider whether their strategy has merit and is attractive.
§ How will the business fit within the buyer’s existing structure and what synergies are forecast? Often acquisitions are justified not just on the value of the business, but the value that can be generated through either sales synergies (whereby incremental sales arise) or cost synergies (reliant on removing costs from the target business). While the merits of such approaches are specific on each situation, it is still important for the seller to understand the future plan.
Since the efficient and timely completion of the process is critical, key questions for the buyer (which will be of particular importance to your M&A advisors based on a success-based fee!) may be ;
§ How will the buyer finance the deal (ie. internal or external funding)? External funding will always carry greater risk since will involve additional approval processes and their capacity for funds may be reliant on macro-economic factors.
§ What is the approval process to complete the transaction? Corporates with overly-formal approval processes may drive the timing of the transaction based on quarterly board meetings etc. It is therefore difficult to grant exclusivity to a buyer when it is unclear as to whether the deal principals already has final board approval.
§ Are there any regulatory approvals required to complete the deal? A buyer who is already a market-leader may have anti-trust concerns requiring voluntary submission to the relevant competition commission. While this process may be normal to the market leader, it adds an additional risk and extended timetable, diluting certainty of completion.
Post completion integration questions tend to be better framed by the entrepreneurs themselves, since they will be the ones personally impacted by the changes introduced, and they will know their own sensitivity to certain areas of change.
§ What integration steps are likely to be introduced and in what timescale? Integration can vary between being wholly absorbed into the buyer’s existing business or continuing to be held separately. Even being retained as an independent will involve an element of fiscal integration and the degree of change can often determine the ability to drive synergies.
§ What will be the seller’s autonomy and levels of approval post-completion? For many sellers the reality of life under a new owner can be best crystallized in how it will change their entrepreneurial leadership and their ability to make decisions on strategy, capex, customer pricing, pay-rises and recruitment.
§ Can I speak to a range of former shareholder of businesses previously acquired, to discuss how the transaction went and how they enjoy life under the buyer? Not unexpectedly a buyer will only present a reference acquisition which has been successful and where the former owner still exists (rather than having been already terminated !). Speaking to fellow entrepreneurs, however always gives additional informal insights as to how the buyer operates in reality, and is the one area of “buyer-presentation” that they cannot fully control or glossed over – and a such should always be pursued.
At Red Swan Partners our team have extensive experience from growing and selling their own businesses, being TIC corporate’s M&A executives, as well as working with a wide range of TIC business owners to support them in the development of their own exit strategy. This wealth of relevant market experience allows us to best advise seller on how they should perform their own diligence on the buyers and support you to secure not only a premium value but the best partner for your business.
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