Even with some softening in the capital markets and ongoing challenges of inflation, talent shortages, and supply issues, the current landscape continues to be a highly competitive market for acquirers to find, connect and purchase businesses. Here are 10 best practices to increase the likelihood of success if you are attempting to build and execute a proprietary acquisition process
Stop searching for Goldilocks. The perfect company does not exist, so stop looking for it. Buyers spend much time early in their search, looking for the ideal company. All companies are a combination of interrelated attributes. Each attribute should be ranked using repeatable and objective metrics. For example, a simple “high to low” ranking concerning risk, fit with the company, upside opportunity, and overall adherence to acquisition criteria can be highly beneficial. You rarely find an issue-free company; if you wait for one to come along, you may never acquire one.
Don’t take on this effort alone. Be honest about how much time you can dedicate, your level of deal experience, your knowledge of the marketplace, and the quality of your network. Having a well-rounded team involved brings different perspectives and insights. The right team increases bandwidth to connect with targets and gather and review information while reducing the probability of missed information or deal bias.
Marketplace relationships are great, but they do not guarantee a pipeline of deals. Your existing relationships can be a double edge sword. Target companies may have a preconceived view of you, your team, your company, or your brand. This bias may be due to an ill-fated interaction in the past, and as a result, you may never get a chance to talk to the target. Additionally, some targets may be unwilling to engage because they view you as a competitor. Or there may be a concern that you are trying to gather market intel. While having companies and people in your CRM is helpful, it will never replace continuously finding creative ways to connect with targets that fit your strategy.
Be prepared to share. Buyers often think Sellers are ready and willing to quickly share their company’s financial information, analysis, and secret sauce. The reality is that most are not. An effective way to get a Seller to open up is by sharing with them first. Be ready to tell your story. How did you get into the business? Why do customers and employees choose you versus someone else? What are your biggest challenges or concerns? Sharing key high-level financial metrics: topline revenue, revenue mix, and growth is a sign that you are entering into this conversation as equals. Remember that there are many Buyers out there. What makes you unique? Keep it succinct but make it personal. You want to earn the Seller’s trust. In the end, trust drives open dialogue about more sensitive information, which you will need to advance the conversation to valuation and structure.
Be flexible; the journey is not linear. The M&A journey is a rollercoaster of high activity and slow periods where you may go days, even weeks, without an actionable next step or exciting opportunity. It is critical to remain positive, prescriptive, and patient. Creating an unnecessary sense of urgency with a proprietary Seller is counterproductive. Very few Sellers dedicate time and resources to a sale effort, at least initially. Sellers naturally keep discussions close to their chest to reduce the likelihood of employees discovering their plans. A Seller’s timeline is often misaligned with yours, but that does not mean they are not working towards the same goal. During the pursuit of acquisitions, remember that statistically, it’s not a matter of “if” an owner will sell; it’s a matter of “when.” Patience and persistence are critical.
Be transparent in how you approach valuing the business. When you have gathered enough intel and information to have views on valuation and structure, share that with the Seller. Transparency allows for open and objective dialogue about the risks and opportunities of the business. Through discussions and review of additional supporting materials, you will feel comfortable placing the right weight on a particular finding and how it impacts the structure or valuation. Transparency increases the likelihood of agreeing on a mutually beneficial way to get a deal done, whether now or down the road.
Motivations are only sometimes obvious. While it can save time to jump to “what is it going to take to get the deal done,” it’s generally not wise to do so until you are ready. This approach on the first phone call or face-to-face meeting can be off-putting to the target. It may create a confrontational tone if it does not push the target away. The motivations and emotions of the Seller are what drive the discussions. These elements take time to reveal themselves. Uncovering them requires attentive listening to the answers given in response to your questions. Allow for the discussion and the relationship to evolve naturally.
Reserve judgment of a Seller that lacks financial expertise. You will encounter attractive businesses with wildly successful owners that cannot articulate their profitability, need to learn or understand GAAP (generally accepted accounting principles), and are materially off on the size and scale of the business. You should be prepared to roll up your sleeves to understand how a target makes money. It is common for owners of middle-market companies to operate based on cash in the bank and the size of their tax liability. Their financial acumen and the quality of their financials will present themselves early in the relationship. Encourage them to involve their accountant or someone else with a more robust handle on the numbers as early as possible.
As the process unfolds, a Seller’s “number” may change. Be prepared that the first honest feedback from the Seller comes when you tender your first offer – even if many of the terms have been discussed and verbally acknowledged. Sharing the offer in writing formalizes and often recalibrates the process. This may be the first-time outside advisors (CPAs, Attorneys, Wealth Management Professionals, Intermediaries, Investment Bankers, or spouses) get involved. These advisors often do not know you or your intentions and are unaware of the inherent or perceived risks and concerns discussed with the owner as you’ve developed your valuation and deal structure. Many buyers gloss over those topics when sharing their advisors’ indication of interest (IOI) or letter of intent (LOI). So, be ready to explain and defend your position objectively. Also, be prepared for the resulting response or counteroffer to be significantly different from the discussions leading up to that point. Listen to what the Seller says. Know your walk-away number; if reached, do just that, and you will find another opportunity.
Remember, buying a company is a marathon, not a sprint. Accepting this will allow opportunities to develop and evolve at a natural pace. Treat everyone with respect, be open and honest in your feedback, and never forget it is not a matter of “if” an owner will sell; it is simply a matter of “when.”
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China Tariffs & Labor Impacts
Thought Leadership Series
Volume 1, Issue No. 1
G2 Capital Advisors is pleased to introduce the first issue of its’ recurring Thought Leadership Series. This issue features a piece written by Michael Williams, Director of Industrials & Manufacturing at G2 Capital Advisors who discusses recent implications of China Tariffs on the American Workforce.