We have had many clients over the years come to us and talk about wanting or needing to sell their business. Several of these have been approached by PE funds or strategic acquirers that I would consider to be “serial acquirers.” In either of these situations, you are talking about dealing with someone on the other side of the table who likely has significantly more experience in buying and selling businesses than you do.
PE funds buy and sell businesses for a living. If you are approached by one, they have possibly already acquired several businesses just like you in terms of size, scope and type of business. For example, if you have a business of manufacturing and selling ready-to-eat cookies, a PE fund may approach you with a Letter of Intent (LOI) or offer sheet. And in the past two years, they may have already acquired three other cookie companies like yours, a pre-packaged food distribution company, a company that manufactures baking equipment and another company that manufactures packaging materials for food resellers. Also keep in mind that a suitor like that may have looked at ten other businesses like yours and didn’t end up buying them. So they obviously will know about the operations of your business from just about every angle imaginable.
Serial acquirers are also looking to maximize value and they will want to pay the smallest price they can to acquire your business. So it’s critical for a seller to know exactly what his/her business is worth. We recommend a seller confer with a valuation specialist to get at least an estimate of their value. In my experience, I have seen clients significantly underestimate or overestimate the value of their business, sometimes by very significant amounts. A valuation specialist will be likely be applying very similar valuation techniques that a buyer would, so their conclusion can be useful when comparing offers. While no one likes the added cost of a formal valuation, it can be valuable knowledge before negotiations with a potential buyer commence.
In anticipation of a potential transaction, sellers also need to spend time “cleaning up” their books and records to ensure everything is in order and readily available. Due diligence can be a very thorough process and sometimes fast-paced. Buyers don’t like delays caused by sellers trying to dig up old records and documents. The purpose of the diligence process is so a potential buyer can get comfortable that they are getting what they expect to get, and there are no surprises after closing. If a buyer is struggling to get the requested information, buyers may either walk away, or begin reducing their purchase price offer.
Some business owners may be approached by multiple buyers. Sellers should try and do homework on who is sitting across the bargaining table from them. As mentioned above, PE funds oftentimes will be buying multiple businesses that operate in a similar business and similar geographic region. It may be that an owner knows of a vendor or friendly competitor who has had the PE fund invest with or acquire them. If so, reach out to those business and ask their opinion of the buyer. Obtain as much information about the buyer as you can to help understand their background and experience.
If a business owner has come to the conclusion that selling their business is the right course of action, then don’t be intimidated by a larger more experienced buyer. Just do the homework and pre-sale preparation and the process can go a lot smoother.