Market View - september 2012
How to be a good and effective Buyer

Our focus here is upon businesses which are likely to be bought in the £2-25 million range and are privately owned i.e. not listed on an exchange and not stressed or distressed (different dynamics usually apply to distressed situations for the owner usually has little or no choice and short timescales in which to decide) This means our target group of owners have to make a choice; after all, they do not have to sell at all. The challenge, therefore, is to make it more likely that the Buyer they choose is you.

Ultimately, there are two primary reasons why owners sell: First, they are offered such an excellent, even absurd, price they would be stupid to refuse. Personally, I have never experienced such a case. – it just doesn’t happen. That doesn’t mean it is impossible; you may recall Instagram’s purchase by Facebook for $1 billion in cash and shares. It was reported that the company, which had only been established two years, had no revenue and thirteen staff, but it did have twenty-seven million registered users and was growing fast. It was also reported that Facebook had been courting the company for a good while and was rejected several times. Mark Zuckerberg had the resources to pay whatever he felt like paying. That made Kevin Systrom, its founder and CEO, plus a bunch of venture capitalist and angel shareholders very happy indeed I would imagine. Secondly, t owners are able to obtain an acceptable price and judge the future is brighter with the selected partner. This leads us to the first and possibly most important lesson.

Adopt a Seller’s mindset: as you are unlikely to be offering such a generous price that they will choose you above all others you should want them to find you attractive. It is too easy for a Buyer take on the persona of someone buying a car and visiting a showroom i.e. “I am the guy with the money and I can go anywhere for my new purchase so do what I want otherwise I will go elsewhere”. That definitely will not work. On meeting the party for the first time you should be in selling mode. You should be selling your own vision and your company’s vision and your belief and competence should show through. You want the Seller to understand that vision and hopefully be excited about it. You need to give him a reason to think of your company as the best place for his business’s future.

Be clear about your reasons for buying: Before beginning the process make sure you and your team knows what you are trying to achieve. Is the purpose of the project strategic e.g. a reaction to competitor activity or a response to changing markets or technology? Is it about “bulking-up” on your own route to an intended exit and if so does it add shareholder value? Does it increase or decrease the appeal of your company? Is it to extend the range of services or products offered and is it complementary to your other offerings? Make sure you have a clearly understood reason for the intended purchase and one that can be easily communicated to your potential target companies and, if required, debt providers?

Class of acquisition target: broadly the companies you approach will be in one of these three situations and each may need a different approach:

  • The first are companies well-known to you and preferably ones where you already have established working relationships. They are often your marketing partners and they can have great appeal. You already work with them and hence you and they understand the benefits and synergies that can be achieved. You have experienced insight into some of their key people, ethics and values as they do of you and yours. This also means a transaction can be more easily achieved because there is already trust between the parties so it doesn’t need to be built from scratch. An understanding may be reached without either having competitive alternatives or a pricing auction.
  • The second situation is where companies which are being marketed for sale and almost invariably have an advisor working on their behalf. These offer the benefit of wishing to exit and hence are committed to the process, have a good business description available, a prepared Information Memorandum for example and are organized for the process. The downside is that they will have been prepared and possibly groomed for sale, there may be tough competition and value will be harder to obtain.
  • The third type is those companies, the majority usually, which you have identified as potential acquisition targets but are not in any sale process. They may very well offer better value and you will often gain a truer understanding of the condition of the business earlier in the process because they haven’t been overly-prepared and it will be a more natural encounter. The disadvantage is you or your advisor will have to persuade them to engage with you in the first place, obtaining information will be harder and slower because it hasn’t been a priority of theirs to have it in a form a potential buyer will need and they may not have the resources to do it well or within your timescale.

Understand the Seller’s shareholder mix: before making and structuring an offer make sure you have identified the individual shareholders who you will need to accept the bid to ensure a transaction takes place. Occasionally it may be a single dominant owner but much of the time it is a handful of key people. During your dealings with the people learn their motivation and desires: different people can have many varying financial and work aspirations and they will appreciate you trying to meet these. It is not just about the headline price but the structure of the transaction: cash or shares or a mix; paid immediately or part deferred; earn-out or a one-off price; employment, consultancy going forward or a clean exit are some of the more important considerations.

Be honest and realistic in your dealings. Make sure you always tell the truth and deliver to the expectations you, yourself set. The target company will judge you on your behaviour. If trust is broken it is almost certainly impossible to rebuild.

Make the “Heads” appropriate: Once you and the Seller are in broad agreement to transact you should both sign a document containing the principal terms of the agreement. This is drafted by the Buyer and is often called a Memorandum of Understanding “(MoU”) or “Heads of Agreement (“Heads”) and will usually contain such information as headline price and main terms, period to close, exclusivity, confidentiality, treatment of each side’s costs, governing law and anything either parties considers important. It should not be too detailed – that is the job of the Sale and Purchase Agreement (“SPA”) and should be expressed in plain language.

Why use an M&A advisor: First the process is very time consuming so having someone doing the research, preparation and initial approach to the target allows the Buyer management to focus on the day job, making a success of the existing assets. Secondly, an experienced and effective advisor is more likely to uncover undervalued businesses. Thirdly, the targets often feel more comfortable where there is an intermediary they can talk too on sensitive matters before they are raised formally with the Buyer. Fourthly, the right advisor has seen many more situations than most in-house management teams and hence is more likely to have more solutions to the problems which crop-up. Finally, more transactions are completed when an advisor is employed than when one is not. The advisor will also be there to help for post-transaction issues which might arise especially if an earn out is part of the structure.

In summary:

  • Have clear objectives when defining your targets;
  • Understand the specific dynamics for targets in the three different situations from knowing them well, those in a sale process and those not actively being marketed;
  • Sell your vision before going into Buyer mode;
  • Recognise and meet the different expectations of individual shareholders;
  • Be truthful;
  • Offer a clear and straightforward “Heads”;
  • Engage an M&A practitioner.