By Tim Malott
As an investment banker, I sometimes get brought into a situation where business owners have already identified a buyer for their company. In their minds, my role is to come in, negotiate the terms, coordinate the due diligence and get the deal closed.
The big problem in these circumstances is that the sellers more than likely left money on the table. That’s because they almost certainly looked only at organizations within or related to their industry. This limits opportunities. In the more than 20 years that I’ve been contracted to seek out and negotiate the sale of companies, I’ve never closed a deal where the buyer was on my client’s radar screen.
The reality is when a competitor acquires you, it’s typically not a strategic purchase. They’re simply increasing market share. I strongly encourage business owners to look more broadly. A better question to ask is what companies could benefit from owning the organization’s products, services, technology or customer base. While not the typical way mergers and acquisitions advisers look at getting deals done, this line of thinking is more accretive; in other words, incrementally beneficial to the transaction’s economic value.
Here’s a good example of what I mean. If a purchaser sees a company’s customer base as beneficial for its own products and services, the deal has exponential benefits to the acquirer’s bottom line, and not just in terms of gaining market share. This makes the price they would be willing to pay significantly higher.
To uncover this potential for a business owner, we go through a comprehensive, half-day, intense and confidential meeting at the beginning of our agreement to learn everything about the company. We talk about their history, identify the key milestones that attributed to their growth and the events that helped get them there. We also go through the operations, people, competition, industry trends and the financials. The last item is not a cursory overview, but a line-by-line analysis to understand from where the revenue comes, how it’s generated and what costs the company incurs to support its operations including one-time or unusual costs that we can “recast” or add back to the bottom line.
Our goal from that meeting is to craft an in-depth narrative of the company. We codify this in a 20-30 page document. It’s time consuming but worth it. Unlike an executive summary or PowerPoint presentation, our memorandum spells out all the intricacies that make the business worthy of acquisition. Those that read the narrative will understand the company extraordinarily well and can make strategic decisions on its value.
I would recommend any business owner contemplating the sale of his or her organization go through a similar process. You will reap greater rewards when you do. It’s not enough for us to ask the question “Who wants this type of company?” but rather “Who needs it.”
Tim Malott is a partner with of Shoreline Partners and has led numerous sale, merger, acquisition and financing assignments across a wide array of industries. He is a former CPA and bank president.