Prioritizing Buyers

Selling a Business: Prioritizing Buyers

One of the questions we get from business brokers – and from business owners that we are advising – is how do we rank potential buyers when we are engaged to sell a business.

There are probably as many ways of prioritizing buyers as there are professional business brokers and M&A advisors but I recently read an article by Ken Collins, a New York-based advisor, that I thought captured the essence of the best methods. Ken and I corresponded and he graciously agreed to me posting his article.

Most of Ken’s advice is geared toward lower Middle Market companies – those with revenues of between $5 million and $50 million – but the concepts can be used by professional business brokers and advisors working with smaller transactions, as well. Even brokers and business owners working in the Main Street market – companies with revenues of less than $1 million – can benefit from his comments.

Ken has been in the investment banking and M&A business for more than 20 years and if you’re a professional business broker or advisor – or want to become one – his insight into ranking potential buyers of the businesses you’re representing should prove quite useful and is reprinted here.

Among the most challenging aspects of selling a business is identifying the best pool of potential buyers. You want a range of buyer prospects – but you must also be careful of sharing proprietary company information with more people than necessary. The solution lies in the caliber of the target list rather than in sheer numbers.

I find it very helpful to classify prospective buyers as A, B or C – that is, the very best prospects from a strategic and financial point of view; those we believe are likely to express interest; and the remaining prospects that for one reason or another may have an interest. In my experience, the successful buyer comes from the A or B list almost 90 percent of the time. The C list is there to be sure we don’t ignore the outliers.

I try to discourage clients from going down a one-lane road with a single prospect who may be their main competitor or someone who has approached them directly in the past. Taking that route to its logical conclusion ultimately puts the seller in the position of facing a “yes-or-no” decision: should I sell my company to this buyer on these terms or not? Better by far to set the stage for an “either-or” decision after you and your advisor have attracted offers from several buyers whose bids afford you meaningful negotiating leverage.

Strategic buyers will normally head the list of prospective buyers. They are the operating companies that provide similar products or services and are often competitors, suppliers or customers of your firm. They may also be looking to expand into your market and diversify their revenue sources. Their goal is to acquire companies whose products or services can be integrated into their existing operations to produce cost savings and potentially to increase sales and/or pricing leverage.

To identify those benefits, or “synergies,” strategic buyers need to dig deep into the client’s business to analyze the value drivers: which products and services are sold to their existing customers; is there customer overlap; are there manufacturing and distribution economies of scale; back-office savings; intellectual property; etc. Strategic buyers plan to own the business indefinitely and integrate it into existing operations.

Financial buyers should also be included on the target list – private equity firms, venture capital firms, hedge funds, family investment offices and private investors. These firms are in the business of making investments in companies and realizing a return on their investment. They’re looking for companies with attractive growth opportunities, competitive advantages, growing markets and strong management. Financial buyers plan to realize a return on their investment within a few years through a sale or IPO.

A good M&A advisor will help you develop a broad yet targeted list of prospective buyers that will ultimately invite bids and enable you to maximize your negotiating leverage, pitting buyers against one another to produce the best price and the best terms. Once you have selected the buyer and signed an LOI, your advisor will work with all parties to ensure a seamless due diligence process, working with you and your attorney to finalize the purchase agreement and close the transaction.