M&A Myths: 20 Buyers Are Better Than 2
Everyone likes to feel in demand, so it’s no surprise that vendors often fall into the trap of trying to maximise the number of potential buyers for their business. In reality, however, whilst “interest” from multiple parties may be flattering, it rarely yields the best result for vendors.
Selling a business is very different to selling a house, but a number of advisors fail to see this and don’t adopt a different approach. Producing a glossy sales document and marketing it to a broad pool of parties certainly works for residential property, but is often highly detrimental in the world of company sales. This is for two key reasons:
One of the key concerns of vendors in my experience is around confidentiality. The “leaking” of a sale process can be damaging both internally (with the risk of employees leaving) and externally (with customers and suppliers becoming concerned about the future relationship).
These concerns are absolutely valid; however, even further risk comes from the prospective buyers themselves. Where businesses are being marketed to trade buyers, it is highly likely that a number of these parties will be direct competitors – this is where a scatter-gun approach to marketing can be particularly damaging.
When approached about a potential acquisition opportunity, most buyers will be willing to sign a non-disclosure agreement (“NDA”) in order to get visibility of a competitor’s information memorandum. These documents are generally pretty comprehensive, containing sensitive commercial information that could be highly valuable in the marketplace. It’s hard to blame competitors for signing an NDA simply to have a peek at the information when an advisor has knocked on their door offering it to them.
It’s therefore vital that a more considered approach is taken. Firstly, your advisors should undertake a detailed buyer research exercise to identify those parties who have the financial capability, strategic intent and track record to complete the acquisition. Secondly, when approaching prospective buyers, advisors should actively challenge these parties before committing to sharing confidential information, regardless of whether an NDA is in place. Furthermore, when dealing with direct competitors, marketing documentation should be tailored to remove particularly sensitive data. This information can be held back until later in the process (i.e. during diligence) to ensure that the competitor is truly interested in the acquisition before it is released.
2. Focus and attention
Over and above the commercial risks around confidentiality, a broad marketing process is also unlikely to generate best value for the vendor. This is because businesses are worth different amounts to different acquirers. Sharing a standard set of information with all acquirers will not allow each party to assess the true worth of the target to them.
It’s therefore important that advisors use a tailored approach, assessing the potential synergies with each acquirer and the opportunities that a combined business may create. Identifying these synergies and articulating them concisely is hugely beneficial in increasing valuations and obtaining the best result for vendors.
However, taking this bespoke and tailored approach with a broad buyer pool is simply impossible. Synergy opportunities and selling messages will likely become generic, failing to highlight the true value of the business to each acquirer. This lack of focus and attention showed to the most strategic acquirers will no doubt be detrimental to their valuations of the business.
A scatter-gun approach may well produce a surge in initial interest in a business, but it’s a high-risk tactic that is unlikely to generate the best value for the vendor. A more considered and bespoke approach may only involve a handful of parties but will allow you to fully educate them on the business and synergy opportunities, thereby maximising their offers.
Remember – it’s nice to feel wanted, but focus on receiving attention from truly interested parties or it could be costly to you and your business.
This article originally appeared on Eclipse Corporate Finance and has been republished with permission.