M&A and Corporate Advisory Director at RSM Poland
If you are thinking about selling your business, sooner or later you will have to handle what is a crucial thing for this process, namely attract the right buyer to your business offer.
What we are seeing at RSM Poland when preparing M&A transactions during our legal advisory services is that many people and organisations selling their business, a company or an organised part of an enterprise tend to focus on the highest possible transaction price. A high valuation of the business becomes the chief factor in the process of searching for a buyer, according to the philosophy that it does not matter who the buyer is, what matters is that they pay the price you ask for. Unfortunately, this not really the right approach. For people and organisations buying a company it is not just the price to be paid that is important (though it must be perceived as attractive), but also a lot of other elements, such as for example the brand’s strength and the company’s relations with clients and suppliers.
For this reason, it is very often the case that if you are only searching according to the aforementioned financial criterion, you do not get any tangible results. Therefore, when planning to sell your business, you should properly search the market and look at this business transaction from a much broader perspective. What should you pay attention to when looking for a prospective buyer and how to reach them in the shortest possible time?
Motivation behind the acquisition as the key to success
The first important thing the seller should do is to identify key drivers for acquisition in different groups of potential buyers. This is going to help you properly target your further, more detailed search among different groups of buyers. Several key groups should be considered, namely:
- Competition: key competitors of the target company will surely see the acquisition as an opportunity to effectively eliminate the competitor and win a larger market share,
- Developing organisations: for them, the acquisition of the company would be attractive due to the possibility to enter new markets or gain a new distribution channel,
- Companies operating in a similar industry: thanks to the acquisition, they could extend their product or service portfolio,
- Foreign companies: those planning to start operations in a new country or region as part of their geographical expansion strategy,
- Entities seeking know-how: as well as companies looking for ways to acquire, for example, production capacities they do not have and which could be quickly extended through the acquisition,
- Financial investors: operating as private equity, who may approach the acquisition as a way of adding another item to their investment portfolio.
The right buyer
The best type of buyer is one that has a good understanding of the industry in which the target company operates. Some business owners prefer strategic buyers because their acquisition strategy is based primarily on the economies of scale. For them, the transaction is actually about the future profits it may bring. Therefore, strategic buyers are looking for acquisition opportunities that will help them meet the objectives of the companies they already own.
Please note, however, that some strategic buyers are not going to pay a higher price in fact. Their expertise will help them assess that, e.g. the barrier to entry in an industry in which they operate has already been overcome by their own brand.
The art of adequate business valuation
As I have already mentioned, what many sellers want to achieve in the first place is the price they have set. Yet, you should remember that going for a compromise when determining the final acquisition price is a standard practice and it is always a good idea to listen to the other party and their arguments when preparing your contract of sale. It may happen that the seller may overlook certain aspects of the transaction, whereas the buyer notices them right away, and these aspects may have a material effect on the amount of the originally estimated price. This is extremely important, one of the reasons being that at the end of the day it is about completing the transaction at an arm’s length price.
The advantage of having cultural similarities with the contractor
The potential buyer should be reliable and goal-oriented to a similar extent as the current business owner. In particular in the case of family-owned companies, many sellers hesitate to complete the transaction because they are afraid that the new owner will take their business in the wrong direction for some ulterior motives. The fact that the seller and the buyer are a good match goes a long way not only here. It is particularly important if the current owner, under the contract of sale, undertakes to remain in the company for a while, after having completed the transaction. This period sometimes lasts 2-3 years.
Analysing the aforementioned groups of entities and additional elements, helping to find a buyer that is well-matched to the business being sold allows you to come up with the target group and move on to the next stage, i.e. start the process of searching for the buyer.
The road to a successful transaction leads through prescribed channels
There are many channels through which you can reach potential buyers. The following methods deserve a special mention:
This process starts with building the right list of potential buyers. Such a list can be created based on the direct contacts you have and on specialist databases. This approach involves a rather large workload, but the effect is worth the time spent on research. This is all because this activity is targeted: it attracts only those potential buyers who are interested in a predefined industry, namely the one in which the business to be sold operates. Such buyers may be very interested in completing the potential transaction.
This method involves using a variety of media and widely publishing the information that the business is for sale. M&A groups on social media definitely make the right choice here. This indirect action is taken in the hope that the information that is directed at a wide audience will be picked up and noticed by the right target group, so this is not a perfect way to go about it. Reaching potential buyers using this method alone is neither the best nor the fastest technique of selling your business.
However, it works well as an extra option supporting other methods of reaching your buyers. What is very important, as well, is to observe the regulations in force, including, in particular, any limitations under the Act on Public Offering.
Relying on a transaction advisor
Sometimes, a list of contacts built on your own is not enough, and the indirect method does not work. At this point, it is worth thinking about engaging a transaction advisor. Entities such as consultancy companies, investment bankers, lawyers and other financial experts specialising in M&A can help you effectively present the company you want to sell to the right buyers. Due to the nature of their business, transaction advisors tend to have an extensive network of contacts (including international ones) and specialist tools that considerably streamline the process of identifying potential buyers.
You should also bear it in mind that these are usually persons and entities who handle the transaction processes from end to end, thanks to which they are able to sell fast and effectively, efficiently managing the entire process and smoothly removing any legal obstacles that appear on the way. This is the most effective channel of reaching your potential buyers.
Professional and well-prepared
When selling your business, before you contact any potential buyers you must remember that you have to make proper arrangements for the upcoming business discussions. A teaser and a non-disclosure agreement (NDA) should be the bare minimum. An information memorandum may also be very helpful: many potential buyers may expect this type of report to be available to them before they make any further moves, e.g. before they make an initial acquisition proposal or before due diligence.
Although the methods of searching for potential buyers could be described in a couple of bullet points, the practice shows that the entire acquisition process is neither the easiest nor the most pleasant. If you are preparing to sell your business, it is a good idea to think about what this process should look like step by step, or, simply rely on the assistance of experts who are perfectly familiar with what it is all about.
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