How to Develop a Buyer Universe on Sell-Side Transactions
When it comes time to sell your business, it’s important to find the right fit. That means not only securing an attractive price but also achieving wishlist items that are important to you, like, say, an all-cash transaction. To accomplish this, whether selling a company or divesting a non-core asset, it is wise to work alongside an experienced advisor in developing a buyer universe that will be the linchpin of completing a successful M&A process.
The good news is that sellers are in a strong position. Spurred by strong cash positions and easy credit, buyers are competing aggressively and paying premium valuations for a limited supply of high-performing companies.
Furthermore, foreign buyers are expressing interest in gaining a foothold in the U.S., and family offices are increasingly employing direct investment programs, increasing the pool of potential buyers.
With these factors at play, make sure you are adequately prepared for navigating a deal process.
How to Build a Buyer Universe
With the right steps, finding the perfect buyer—whether a corporation, family office or private equity firm—doesn’t have to be overwhelming.
Copper Run is experienced in formulating a buyer universe from a variety of resources, including events and associations, third-party databases, personal contacts and our own proprietary database.
Once the collective list has been formed, the prospective buyers are organized by tier, accounting for deal experience, strategic fit and financing. This is where an advisor’s industry knowledge is especially helpful.
It’s best to organize the buyers into several main categories.
Strategic Buyers: Strategic buyers are interested in integrating a seller into their long-term business plan. This can be a direct competitor, a supplier or a customer or a completely unrelated company that is looking to enter a new market.
Advantages: A strategic buyer typically purchases 100% of the selling company, and may be able to provide a higher valuation due to synergies being incorporated in the purchase price.
Disadvantages: Ownership and management is not as essential to the buyer in this scenario.
Private Equity Financial Buyers: Private equity firms invest in and acquire equity ownership in platform and add-on companies, with a business model of buying, growing and selling.
Advantages: Large amount of capital backing to grow the selling company organically and through acquisitions, as well as management expertise and strategic connections.
Disadvantages: Funds are made of many Limited Partners and the investment is usually only 5-7 years. This type of buyer typically takes a more hands-on approach to management than a family office and generally want the owner and management to remain.
Family Office Financial Buyers: Family offices are private companies that manage financial and investment activity for one or several ultra-high net worth investors.
Advantages: There is a long-term investment horizon of 10 years or more. Family office financial buyers typically include small, flexible investment teams for quick investment execution. They are often all-cash transactions.
Disadvantages: There is less variety in financing options than private equity. These buyers generally want the owner and management to remain with the company.
Narrowing the field
After the buyer universe is established and the prospective buyers have been tiered, the process takes the shape of a funnel as the list is narrowed. An advisor’s experience will be helpful for knowing details about a specific buyer, like whether they have just completed another major transaction, which will influence their likelihood of pursuing another deal.
Here’s an example of how the funnel could look with a universe of 150 prospective buyers:
150 teasers delivered. After adjusting the list with your input, an advisor will send an initial one-page “teaser” to market the seller.
70 contacts made. Some of the buyers will request more information on the client.
50 CIMs distributed. NDA will be signed and then the CIM can be delivered to these potential buyers.
20 IOIs received. Meetings between select buyers and the seller determine terms of the potential transaction.
8 LOIs received. Data room access due diligence legal work.
Final buyer. Finalize deal terms closing business.
Generally, the entire process takes six to eight months from beginning to end.
Having a larger universe of buyers will help to ensure you’re getting the best possible price. However, it is worth noting that an unnecessarily large list can complicate and potentially lengthen the process, as well as create more concerns around confidentiality. For clients operating in highly fragmented industries, a pool of potential buyers over 100 can occur. For others operating in a niche market or with a unique business model, there may only be a handful of buyers that make sense.
Having completed more than 115 deals, Copper Run has significant combined experience. We know the ins and outs of all sell-side process alternatives and we welcome questions as to how
your organization can establish a buyer universe and ultimately connect with the perfect buyer.
Matthew Roberts is Vice President at Copper Run. He specializes in the business services, distribution and manufacturing sectors.