As business owners near the time when they want to call time on their careers, the thought of selling their company is usually at the forefront of their minds. This is when finding an investor to take the reins starts to become a priority. Finding a suitable buyer who is willing to protect the ethos of the business can be a significant challenge. In cases such as this, it is a good idea to bring in the help of a reputable M&A advisory firm to help expedite the process.
In preparing a business for sale, an M&A advisor will first conduct an extensive interview with the business owner in order to profile the business, its competitive advantage and growth prospects. A cash flow forecast then carried out before a valuation by an accredited third-party valuation firm is conducted. When the results of the valuation are in, the business owner will then decide if they would like to push forward with a sale. If so, the buyer/investor target markets are defined and the marketing strategy is formulated.
Set Up a Thoughtful Marketing Strategy
The marketing strategy will include both passive and active marketing components to target potential investors. The passive component primarily consists of advertising the business in a broad fashion on a range of websites used by the identified target investor group. The active component, on the other hand, involves sifting through the company’s database for previous buyer inquiries. When a number of potential targets have been identified, additional investor data will be acquired before they are contacted with a sale proposal by letter, email and phone call.
Providing leverage to the seller is dependent on generating multiple simultaneous buyer inquiries. In order to do this, the investor recruitment approach mentioned above needs to be widespread to create the potential for a bidding war. Pinning your hopes on a single prospective buyer will not provide the seller much in the way of leverage, leaving the seller to depend on this single buyer’s whims.
Narrowing Down Potential Candidates
Once multiple investors have been attracted, the next task is to select the right investor from among them. Doing so will involve an examination of the true motivation and financial qualification of the individual or company. It makes little sense to waste time with an investor who either cannot financially execute a particular acquisition or has little motivation to proceed with the transaction. Be aware that taking a business off the market for a buyer that is hesitant about proceeding will preclude competing investor inquiries in the interim (typically dictated in an exclusivity provision in the LOI).
Experienced M&A firms will have a tried and tested protocol for the investor selection process. The selection process ranks investors according to a scale, marking investors who do things like refuse to provide POF (proof of funds) down automatically. Alternatively, an investor who presents a heavily redacted Non-Disclosure Agreement (NDA) is immediately designated as “less desirable”.
In basic terms, every investor pre-qualification process should include three requirements:
- Financial Statement with POF
- Non-Disclosure Agreement
- Management & General Background
Should investors shift the goalposts regarding the requirements above after initial contact with the M&A firm are red-flagged and moved to the end of the line. Beware of investors who tamper with the NDA or cannot provide sufficient POF. Problems like these at the outset often presage future troubles negations, so it is usually prudent to vet investors that show signs of unreliability immediately.
Despite the pitfalls mentioned above, sellers desperate to sell at all cost overlook potential problems, only to find themselves embroiled in an extended due diligence process down the line. When this happens, it is not uncommon for the buyer to either walk away or attempt to low-ball on price at a late stage of the deal at the end.
To sum up, an experienced M&A advisor will tell you that not only do multiple buyers need to be pooled, but investors must be subject to pre-qualification standards to ensure a business owner can ultimately pass the business on to a motivated and qualified successor.