M&A Mistake #5: Pre-Judging Potential Buyers
It is critically important for business owners to fully understand the various options available to them, both in terms of buyer categories and specific companies within each. Depending on the seller’s desired outcome, their options may include domestic and international strategic (corporate) buyers, private equity, and other types of financial buyers, or both. It also may include groups that will take a minority stake in your business, in addition to those groups who look to acquire controlling majority positions in companies. It is only with a full understanding of the available options that sellers can make informed decisions about which buyers to contact in the first place, and ultimately, with which buyer they choose to transact. Otherwise, they risk looking back on the sale of their business with regret at stones left unturned. In this excerpt from Chapter 8, we see how preconceived opinions about specific buyers, which I’ve seen all too often, nearly cratered a sale process.
Gavin Price, an investment banking colleague of mine, recently recounted a story about a healthcare services business that he worked on selling a few years ago. The client, Keisha Lancaster, had strong pre-conceived ideas about who would be the best buyer for her business, and the process that unfolded clearly illustrated the importance of the seller’s keeping an open mind. “Right from our first meeting with Keisha, while we were still competing for the engagement with several other investment banks, we could see that she felt very strongly about certain industry buyers.” In that pitch meeting, Gavin presented his firm’s qualifications to run an M&A auction process for Keisha’s business, including how he would position the company to buyers, how each phase of the process would unfold, and a representative sample of the types of buyers they would recommend contacting. As Gavin began the section of his presentation on potential buyers, Keisha interrupted with observations on two of the companies that Gavin’s firm had profiled. First, she assured Gavin that she knew that Latham Corp. would be the ultimate buyer of his business. Latham had been calling on her over the past several years, expressing a strong interest in acquiring her business whenever she decided to sell. They were well-regarded in the industry, had made several successful acquisitions, and had been aggressively pursuing Keisha for a long time. Keisha was also sure that she did not want to contact Royal Industries, another market participant Gavin profiled as a representative potential buyer. Keisha believed that Royal had a poor reputation in the industry, didn’t see a compelling rationale for combining her business with theirs, and was not aware of any acquisitions that Royal had made. In Keisha’s mind, the M&A process should focus entirely on Latham, and she was indifferent about whether any additional buyers were contacted, with the singular exception of Royal, who she wanted to strike completely from the process. Gavin took note of Keisha’s feedback and continued his presentation. Shortly after engaging Gavin’s firm to sell his business, Keisha introduced Gavin to Samuel Waters, her contact at Latham, who was excited to learn that Keisha had decided to sell her company, but also somewhat discouraged that Gavin’s firm had been engaged to run a process. “Given the relationship that we’ve built over the years,” Samuel told Keisha, “we expected that you’d give us the first look, not hire a banker and market the business to other buyers. We don’t like to play in auctions.” Samuel asked that Keisha give Latham a sixty-day exclusive period to come to an agreement on deal terms without contacting any other buyers. Following Gavin’s advice, Keisha declined to go exclusive with Latham but encouraged them to work with Gavin through the process, which Samuel reluctantly agreed to do. As Keisha reviewed the full list of potential buyers that Gavin’s firm presented for his approval, she again stopped on Royal. “I don’t think we should contact them at all,” Keisha commented, “I can’t believe we’d ever want to sell to them.” Based on Gavin’s research, he highlighted the strategic fit that he believed existed with Royal and encouraged Keisha to reconsider. Ultimately, she acquiesced and allowed Royal to be included in the potential buyer calls. Gavin’s firm finalized the Confidential Information Memorandum and began contacting those groups on the approved buyer list. After interested parties signed a Confidentiality Agreement and received the CIM, they submitted first-round bids, which would then be used to select bidders to have face-to-face meetings with management. Sure enough, Latham was the highest of the fifteen initial bids received, with Royal solidly in the middle of the pack. Keisha again raised the idea of setting aside the other buyers in favor of moving forward exclusively with Latham, but Gavin pushed back, recommending against committing to one buyer prior to even having a single in-depth meeting with them. Ultimately, Keisha agreed to have management meetings with the top eight groups, including Latham and Royal. On the eve of the first meeting, Keisha received some bad news. Her largest customer, which accounted for about 30 percent of sales, was temporarily halting its purchases from Keisha due to weakening demand in its business. Suddenly, Keisha’s growth targets for the current year needed to be revised downward, which she communicated to each of the eight buyers during the in-person meetings. While the groups remain interested, the reduction in sales dampened the excitement level among the buyers, and they indicated that their first-round bids would likely need to be revised downward accordingly. In addition, Keisha was surprised when her meeting with the favored Latham didn’t go as well as many of the others. Samuel and his colleagues didn’t seem to have a strong understanding of Keisha’s lines of business, and they lacked the enthusiasm that had existed during their informal discussions over the years. After the meeting with Latham ended, Keisha shared with Gavin her concern that Latham may be losing interest and how glad she was that there were other competing bidders. Keisha also noticed that the meeting with Royal went much better than she’d expected and considered that perhaps her belief in their poor reputation was unwarranted, as she enjoyed meeting the Royal executives that attended the meeting. When the deadline for final bids arrived, Gavin received offers from five of the eight groups that had visited with Keisha and her management team. Royal, the black sheep, was the top bidder, and Latham had dropped out without submitting any offer at all, citing concerns over the slowdown at Keisha’s top customer and there being less of a strategic fit with their core business than they had originally believed there would be. “We selected Royal as the winning buyer,” Gavin recalls, “and it turns out they were the most accommodating buyer we could have hoped for.” Royal sailed through their confirmatory due diligence without raising any issues, and the negotiations of the legal documentation, the Purchase & Sale Agreement, also went smoothly. The sale of Keisha’s business to Royal was completed ahead of schedule and at a purchase price that exceeded her initial expectations. “I’m so glad I followed Gavin’s advice to include Royal in the process and not focus too heavily on Latham,” Keisha noted. “Otherwise, we would have been left at the altar when Latham backed out, and we would have had to restart the process from the beginning, wasting valuable months in the setback.”
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In this article series, I share excerpts and stories from my book, The $100 Million Exit. I hope you enjoyed this post — if you did and want to connect, you can reach me via email at email@example.com or connect with me at https://www.linkedin.com/in/jbrabrand/. Also, you can find my book on Amazon here: https://www.amazon.com/dp/1641375175