George P. Shenas

Finding the Right Strategic or Financial Buyer for your Business

Let's assume you are interested in selling your business - how can you identify possible buyers? What does it mean when people ask if you are looking for a "financial buyer" or a "strategic buyer"? Unless your business has grown large enough or you are in a certain very specialized, high-growth niche, you are unlikely to find a viable financing or exit strategy utilizing an initial public offering (IPO). One group of potential buyers is composed of people you already know well: your key personnel, managers or other employees, or even the next generation of your family. Even if these particular routes are closed, however, and you are thinking about selling your company, buyers can come from anywhere - your customers, suppliers, industry competition or financial investors. Such buyers, who are unrelated to you, can usually be divided into two groups: financial buyers and strategic buyers. This article will help you understand the differences, as well as how to identify and contact strategic buyers in particular.

Financial buyers
These types of buyers are primarily interested in your company's cash flow and its capitalized value. They are typically individuals or companies with money to invest, and are willing to look at many different types of businesses or industries. Usually, they are private equity or venture companies that are looking for good returns on their investments, would like to realize an appreciation on their investment as a result of your positive performance, and would like your current management to stay in place. Financial buyers will scrutinize your financial statements and your assets very closely. Most are looking for a solid, well-managed company that won't need a great deal of immediate change, but there are some investors who specialize in turnaround situations and will be willing to look at companies that are not currently profitable. Realistically, it will be difficult to identify potential buyers in this category without professional assistance and their corresponding network of contacts, because it is quite possible that your company will never have come in direct contact with a single potential buyer in this category in the ordinary course of its business. Fortunately, if you want to find investment bankers who focus on your company's particular product line or array of services, it won't take long to get started. Type in the right phrases on a search engine like Google, and, within seconds, you're looking at relevant results. Unfortunately, at the time where credit markets are tight and financial investments are coming under increasing due diligence scrutiny, the number of financial buyers overall is significantly less than in the recent past, and strategic buying has taken the lead in terms of mergers and acquisitions (M&A) activity.

Strategic buyers
You can do a lot more of the legwork yourself when identifying potential strategic buyers. Strategic buyers are those who are interested in your company's fit into their own long-range business plans. They may be one of your competitors, or a similar company from another region that wants to expand into your local area. The classic strategic buyer would be a larger company who does what you do in a nearby region. Another possibility is a company in a related business, whose management can see that your company has strengths from which they can benefit; e.g., you may already produce a product that fills out their product line, or you may have distribution channels that they want to exploit. Sometimes these types of buyers - who are in related, but not completely parallel businesses - are referred to as "synergistic buyers." Whether synergistic or competitive, strategic buyers are generally the ones who will pay you the most for your company. The better the fit, the more they will want your business and the greater the premium they will likely be willing to pay.

Identifying Contacts at Strategic Buyers
Unlike searching for investment bankers or sales advisors, where you will readily find the names and contact information of individuals who can help, figuring out who focuses on M&A at a specific corporation is a much more daunting task. At large public companies like General Electric or Microsoft, there are specific people who head acquisition efforts and have titles to reflect it (these people typically advertise their contact details and often speak at industry events). But for the vast majority of companies, people at least partially tasked with the job of identifying target companies worth acquiring are much more elusive and often don't advertise this part of their job description. Sometimes the best contact is the VP of Business Development, other times it's a so-called "C-suite executive" (i.e., CEO, CFO, CIO, COO, CMO or CTO). When targeting these contacts, many have found the best options to be accessing lists of corporate contacts through events, through publications like M&A Magazine¹ and Investment Dealers' Digest IDD Magazine², and through associations like the Association for Corporate Growth (ACG)³.

Tailoring your Message for Strategic Buyer Contacts
In the spirit of knowing your customer, you will have to keep a few important things in mind when structuring your approach of these in-house contacts:

• Most corporations are not experienced in the M&A field. For many corporations, making an acquisition is a first-time (or even one-time) event. That means inundating them with information is probably secondary in importance to helping them get comfortable with the acquisition process.
  
  
• Most corporate decision-makers have other responsibilities. That means they are often pressed for time, and finding the next acquisition may fluctuate between the top and bottom of their priority list. That contrasts with a private equity firm, whose very existence hinges upon its ability to close the next deal.
  
  
• Most corporate decision-makers are flooded with sales pitches. This is especially true for C-suite executives, who are solicited for everything from software upgrades to consulting services. Sending them a generic, impersonal pitch via fax or email about finding their next deal may not be effective.

Therefore, targeting your message and planning your approach is paramount, particularly at a time when strategic buyers outnumber financial buyers. You may not get several attempts to contact (or several responses from) your target, so be judicious with both your words and your contact's time, and have your facts and arguments ready from the get-go.

Confidentiality is Paramount
A final reminder: you must always be careful in speaking with competitors or people your business currently deals with directly as suppliers, vendors, or customers. To a slightly lesser degree, your communications with investment bankers, advisors or financial buyers should be similarly guarded, or at least kept confidential. Although these third parties may be legitimately interested in buying your business, if the deal falls through, you don't want them to have gained enough information to negatively impact you. Furthermore, if your key employees discover that you have put your company on the market, they might be tempted to leave in a manner detrimental to the on-going health and success of the enterprise. Although you'll want to have potential buyers sign confidentiality agreements to protect your legal rights, don't rely solely on the contract - you need to keep your sensitive information hidden from prying eyes and appropriately secured until a definitive contract is signed.

Marcus H. Klebe