Welcome to day three of our Corporate Finance blog series on selling a business. Today the team look at identifying prospective buyers.
Identifying a robust list of prospective buyers for your company is an essential part of the sale process. If two or more interested parties can be identified, a competitive bidding process can boost sale proceeds.
Collating a detailed list of the buyers who may be interested in your business is a time consuming task. The key is ensuring that all potential buyers have been considered, including the following broad categories: competitors, customers, suppliers, new market entrants, your own management team and investors.
- For confidentiality reasons a vendor might not wish to approach direct competitors. Even where information is supplied to competitors on a confidential basis, there is always a danger that competitors will identify the company for sale and disclose the information to the market, try to win business away from the company or poach the vendor’s key employees.
- Although a vendor should always consider that a competitor may be embarking on a ‘fishing’ exercise for information purposes, a competitor can also offer significant benefits through potential synergies and cost savings. If the business is compatible, a competitor may be willing to “pay the price” to acquire a ready-made means to expand.
Companies in related sectors
- Although most companies focus on their core business stream, some companies still make acquisitions in related industries. It can help an acquirer enter a new market and they may pay a premium price.
- Lateral thinking in terms of identifying related sectors and potentially acquisitive companies within them is important when determining a list of likely buyers.
Suppliers and customers
- Vertical integration can work in certain cases. For example if the company being sold accounts for a large proportion of a supplier’s sales, the supplier may be interested in the acquisition opportunity as a defensive strategy to protect turnover.
- Overseas acquirers accounted for 34% of UK acquisitions in Q2 2014 (Office for National Statistics).
- International buyers typically purchase UK companies to gain a foot hold in the UK.
- Foreign acquirers will often pay more than a domestic trade purchaser but the sales process can often take longer and there are significant cultural and legal implications to consider.
Management buy-outs (MBOs)
- Key employees have significant ‘inside knowledge’ and could be interested in taking over the company. Inside knowledge lowers risk, but the main problem is availability of cash and the fact that the vendor should be prepared for discussion around deferred consideration, earn out and consulting arrangements.
- For an MBO to be feasible, the management remaining with the business following the sale may need to be strengthened to ensure ongoing success.
When identifying buyers the initial list should include no more than 30 names, with a backup ‘B’ list if the ‘A’ list does not produce one or more interested parties. When approaching potential buyers, the business for sale is kept anonymous by using a Corporate Finance advisor who develops a tailored approach to each interested party, contacting the right person at the target company personally.
The IM should be sent out to all interested parties with an outline timetable requesting opening offers on a set date. Once offers have been received a short list is drawn up. It is important at this stage in the process to reject buyers without finance in place to make the purchase and to consider deal structure and the vendor’s objectives.
Understanding the purchaser’s objectives
When presenting information to each potential purchaser it is important for the vendor to understand the potential purchaser’s viewpoint and to ascertain what it is seeking to achieve from the acquisition. Synergies should be highlighted where possible. A purchaser’s starting point in any price negotiations will be that they should not pay for any synergies that they bring to the vendor’s business. However, they may be forced to price in some of these synergies in order to win a competitive auction involving other purchasers who bring similar synergistic benefits to the table.
If you would like some further advice in identifying buyers for your company, please contact a member of our Corporate Finance team.