How do buyers find companies for sale, anyway?
I am often asked by landscape business owners about how a potential buyer makes decisions about which companies they are interested in and how they find companies for sale. There are at least three ways I think of (and many more) and these are based on the size and makeup of your company and the buyer’s size and activity level.
I’ll review the first two of these three types of buyers in this post:
- Serial acquirers including strategic buyers and private equity groups
- Individual buyers who would include people seeking a “lifestyle” business and
- Opportunistic buyers who may be your local competitor in your industry and/or a related industry. (These will behave like 1 or 2 above, depending on their size)
Serial acquirers. These are companies that are committed to growing their organizations via acquisitions in the ordinary course of business. They are likely to have “deal-making” teams with dedicated resources for finding, vetting, and pitching to potential sellers. Professionals will have/build networks of influencers and participate in the industries they are active in for referrals. While they will sometimes work directly with sellers, most will have advisors to assist them with the transaction. Serial acquirers usually set a minimum enterprise value (often in terms of EBITDA, no less than x amount), but will usually keep an open mind for interesting opportunities that are too good to miss. Most of the private equity buyers I hear from are looking for a minimum of $1mil of EBITDA.
Serial acquirers need to build and maintain a healthy deal flow and look at a lot of companies. They will have developed a set of criteria for the companies they want, and they screen for the best matches. The M&A team wants to see all the potential sellers in the industry. That means they contact advisors, use their own contacts, and do some direct outreach to the targeted companies. If they are like we were (in my prior life I did M&A for an NYSE company), they want to hear about every and all potential deals in their space rather than take a chance on missing a great opportunity. In most cases, they have a CRM database of the companies they are interested in and maintain it, so they know about all the movements in these privately held companies. That means collecting and storing a lot of information on the targeted group of companies they want to buy. Many of the largest companies hire a third party to perform market research and/or “hunt” for companies they want to buy.
Once they build that deal flow, they will review every “book” they receive to screen out companies that don’t fit the criteria (and build their database about industry statistics). Most larger acquirers prefer to purchase larger companies, at least to start with, all things being equal. This establishes their presence in a market area, and they can then add to this platform in the area with smaller and more boutique companies. This strategy also works for the acquirer to maximize its impact since a larger transaction will make an impression and is a more efficient use of its resources. It takes almost as many resources to negotiate an offer, go through the due diligence process, prepare all the legal documents, and effect the transfer of the business after closing, including integrating that business into the larger entity, for a smaller company as a larger one.
If a serial acquirer is bidding for a company in their target market, they are likely to move quickly to beat competing firms in gaining an exclusive look at the seller’s company in more detail. They will sign an LOI with the seller quickly if they are interested. From the start of the LOI to closing is a fairly short time frame for this group. They will usually have the resources to get to closing within 3-6 months. From there, the initial part of the orderly transfer of the business after closing may take an additional 30-90 days. (Employee paperwork, notification of clients, lease, change of banking, accounting, financial systems, selecting business system support best practices software, etc.)
Individual Buyers. If your company has revenues of $2-3 million and you are a design/build boutique firm, your enterprise value will be based on the riskier cash flow stream related to the non-recurring nature of your revenue stream. If you have a strong reputation, quality people, and equipment and are willing to assist the buyer in transitioning the business, you may be a candidate for selling to a “lifestyle buyer”. These are individuals who are tired of corporate America and/or working for a third party and having no control over their lives. They are often “pre-qualified” by a business broker who will help them narrow in on the type and size of company they would be best suited for and have the resources to buy. In many cases, they will be pre-qualified for an SBA loan so their transaction could move smoothly from the negotiation of the deal terms (within SBA guidelines) to completion of the sale.
Most buyers are represented by an advisor and/or broker and will be regularly reviewing opportunities of companies for sale that are listed on the broker’s networks. (You can access these yourself by researching companies for sale on google.). Many of the best business broker networks have databases of buyers and can offer sellers, qualified buyers, more quickly than if the buyers weren’t already identified and vetted. While most of the databases will keep the company’s identity somewhat private, it is rarely possible to do so completely, since details about the company would be found on the listing.
Once a buyer is vetted and contacts the broker for the seller and an NDA/Conf Agreement is signed, a book or other similar marketing summary will be prepared, and questions and answers will be exchanged as in the case for serial acquirers. If the parties continue to want to pursue the information sharing, the buyer will often move straight to a purchase agreement outlining the terms of the deal after he/she has seen the due diligence information and had the chance to analyze it. Upon the signing of the Purchase Agreement, the buyer will usually open an escrow account and makes a deposit of earnest money with the escrow agent. As the due diligence is completed, the documents are refined as needed and closing is scheduled. Again, if the parties have “pre-qualified” and are pre-approved for an SBA loan, this process can move quickly, within 3-6 months.
Have you been thinking of selling to an external buyer, now might be your best time for a while. If you’re want to explore your exit options, buy another company or you bought one and now want to integrate it, call me.
I can be reached via email: [email protected] or phone a: 224-688-8838.
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