It is the job of the professional intermediary (business broker, M&A advisor or investment banker) to develop a marketing plan and a target list of potential bidders. You are looking not simply for financial acumen (that is table stakes), but for a combination of marketing prowess, M&A experience, and an ability to serve as a source of emotional support throughout the process.
As you investigate potential brokers/intermediaries/investment bankers to become a member of your M&A team, you should ask to see examples of their output that they use to market business for sale (Teasers and CIMs). How visually appealing are the documents? Are they well written? Are they compelling marketing documents? Do they make you want to invest in the businesses they represented? How professional do they seem, for sophisticated readers?
It may also behoove you to go into some degree of detail asking about their marketing process. How robust is their research and development of target lists? How much effort do they put forth into preparing attractive and compelling marketing materials. How impressive are their past Teasers and CIMs to you?
Types of potential acquirers of your business
There are generally two types of byers: financial and strategic. Financial buyers (sch as private equity groups) are opportunistic, and are looking for a good deal, ways to increase the value efficiently after acquiring, and want comfort that there are minimal risks to the business’ viability such that an exit in three-to-five years will be possible. Financial buyers typically need to convince lenders that your business and their investment thesis, are investment-worthy. In other words, they rely on leverage to finance their deals.
Private equity and other financial buyer are typically very sophisticated because acquisitions are what they live and breathe every day. They typically have deep pockets for future investments n the business, and are determined to increase value. Partnering with financial buyers and rolling over some equity as an investment in the business going forward may facilitate significant financial upside potential. In adition, PE may cause less disruption to the business as a stand-alone entity that strategic acquirers would.
Financial acquirers, however, do bring some downsides. Your ongoing involvement may be required, at a high level of engagement. Financial buyers do lever up the business, meaning, it may be saddled with debt, which could be hard to pay down in a downturn. Financial acquirers typically pay less than financial buyers.
If selling to a private equity (PE) group doesn’t align with your goals or circumstances, several alternative exit strategies or capital-raising options can achieve similar outcomes, depending on your priorities. These alternatives vary based on whether you’re seeking liquidity, growth capital, or a complete exit. Here’s a breakdown:
1. Selling to a Strategic Acquirer
Description: A strategic acquirer is another company (often in the same or a complementary industry) that sees value in acquiring your business to achieve synergies or expand its offerings. Typically, bidders who see synergy (geographic footprint, customer type, product fit) will value your business higher than those who do not.
Pros:
- Potentially higher valuation due to strategic synergies (e.g., cost savings, market share gains).
- Access to greater resources for employees and operations post-acquisition.
- A clearer path for long-term integration and growth.
- May be more likely to allow the seller to walk away from the bsienss entirely
- May provide career training and enhancement for employees
- There is the potential for operating synergies
- Longer-term vision of the future
Cons:
- Your company may lose its identity as it is integrated into the buyer’s operations.
- Employees may face changes or redundancies.
- Potential cultural misalignment with the acquirer.
- Customers may not embrace the acquisition
- Enhanced bureaucratic issues in a larger organization
- The suitors may be your competitors, which means that their diligence opens up your kimono to the enemy.
Strategic acquirers look for synergies in the form of:
- Customer base
- Channel access
- Market access
- Geographic diversification
- Access to new brands to sell
- Growth opportunities
- Elimination of a competitor – market share gins
- Talent in the form of human capital
- Intellectual property
- Economies of scale – reduced operating expenses through efficiencies
2. Selling to a Family Office
Description: Family offices are private investment entities managing the wealth of high-net-worth families, often looking for long-term, steady returns.
Pros:
- Long-term investment horizon with less pressure for a quick exit.
- Greater flexibility in deal structure and operational involvement.
- Cultural and value alignment can sometimes be better than with PE firms.
Cons: - Less industry-specific expertise compared to some PE firms.
- May lack the operational resources to scale your business.
3. Management Buyout (MBO)
Description: In an MBO, your company’s management team acquires ownership, often with external financing from banks or private investors.
Pros:
- Continuity in leadership and vision.
- Provides liquidity for the owner while keeping the business in trusted hands.
- Easier to maintain company culture and retain employees.
Cons: - Financing can be challenging for management teams to secure.
- Growth may be constrained without additional external capital.
- Risks arise if the management team lacks experience in ownership transitions.
4. Selling to an Employee Stock Ownership Plan (ESOP)
Description: An ESOP involves selling your company to employees through a trust, creating an employee-owned business.
Pros:
- Preserves company legacy and fosters employee loyalty.
- Significant tax advantages for the seller and the company.
- Provides liquidity while maintaining the business’s independence.
Cons: - Complex and expensive to set up and administer.
- Requires a stable financial base for the business to thrive under employee ownership.
- Limited growth capital compared to PE or strategic buyers.
5. Venture Capital or Growth Equity
Description: Raise capital from venture capital (VC) or growth equity firms that specialize in scaling businesses without taking full ownership.
Pros:
- Provides growth capital while allowing you to maintain control.
- Access to experienced investors and strategic advice.
- Flexible structures depending on the investor’s approach.
Cons:
- Pressure for aggressive growth and eventual exit (e.g., IPO or sale).
- Dilution of ownership stake.
- May involve significant reporting and governance requirements.
6. Selling to a Competitor
Description: Selling to a direct competitor, often for market share or consolidation purposes.
Pros:
- Likely to understand your industry and offer fair market value.
- Potential for synergies that benefit both businesses.
Cons: - Sharing proprietary information during negotiations can be risky.
- Post-sale dynamics may lead to changes in operations or layoffs.
- Potential backlash from customers or employees.