It takes time and planning to identify qualified buyers for your business. Too often, business owners make emotional or impulsive decisions to sell their business, or worse, it is made for them due to failing health, and consequently they do not receive a fair price for their business.
During the initial planning phase, a business owner must assess the market conditions in which his or her business operates and the business's strengths, weaknesses, opportunities and threats. In addition, an owner must have a sense of how growth can be achieved given existing resources and what growth might be possible with additional resources. In other words, an owner should be able to assess how his or her business can be a platform for growth for a potential buyer.
From this understanding, one can start identifying possible buyers that might be a strategic fit. A strategic buyer will often pay a premium for a business based on:
- Economies of scale
The combined company can often reduce its fixed costs by removing duplicate departments or operations, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins. For example, administrative salaries and rent can often be eliminated as the combined operation moves to one location.
- Economy of scope and cross-selling opportunities
Economies of scope are attained when, for example, efficiencies are gained by increasing the scope of marketing and distribution to additional products (sometimes creating product bundles as seen in the Telecom sector). Access to customer channels is often easier through buying a business than starting from scratch.
- Ability to unlock underutilized assets
In some cases proprietary resources such as R&D, patents, proprietary processes and technologies and even personnel are underutilized because of limited access to capital or other constraints. Acquisition by a more well-resourced company can unlock these assets.
- Access to proprietary technology
In some cases start-up or R&D focused companies have developed technologies that can have an immediate and broad impact on the operations of leading incumbents and substantially improve their competitiveness.
- Increased market power
Acquiring a close competitor can increase market power (by capturing increased market share) to set prices.
- Shoring up weaknesses in key business areas
When talent is hard to attract, acquiring businesses that perform functions that are under performing can be an efficient way to fill gaps.
- Synergy
An example of synergy includes increased purchasing power as a result of bulk-buying discounts.
- Geographical or other diversification
Acquisitions can achieve immediate access to new geographic or product markets. In some cases this can also serve to reduce earnings volatility.
- Providing an opportunistic work environment for key
talent
Growth through acquisitions provides managers new opportunities for career growth and advancement.
- To reach critical mass for an IPO or achieve post IPO
full value
Larger companies typically have more financing options thereby reducing capital risk. Once public, companies need sufficient trading in their shares to realize full value.
- Vertical integration
Vertical integration occurs when a company acquires its supplier or major customer and can result in significant savings if the supplier or customer has substantial market power.
The process of assessing a strategic fit with potential purchasers can start up to several years in advance of a possible sale; this way the business owner can manage the process without neglecting the day to day operations.
When the finish line is in sight, business owners must ultimately create a competitive bidding environment among qualified buyers to realize the best price and structure. A third party M&A advisor can be of tremendous value at this point. Our experience is that a lengthy initial list of potential buyers is soon whittled down to a short list (typically between three and five) of bona-fide buyers that have the desire and the ability to execute a good transaction for both parties. Discretion is paramount at this point and, through an intermediary, it can be maintained by not revealing company specific information in the initial approach and requiring a non-disclosure agreement before detailed information is provided.
In the end, the Principals should sit down face-to-face and discuss the various potential benefits of an M&A transaction. A good fit occurs when the buyer and seller like and respect each other; share common values and can benefit from operational synergies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
