The hyper-competitive M&A market has pushed valuations for privately held companies to historically high levels.  This has resulted in buyers becoming far more aggressive in their direct outreach to business owners in an attempt to avoid acquiring companies through a competitive M&A process. 

Competition Drives Value

It is well known that when a company is sold through a competitive M&A process the seller receives a higher price and better terms.  This should not come as a surprise.  Competitive sales processes, regardless of the asset being sold, force buyers to put up aggressive offers or risk losing the deal.  If you have been in the market to buy a house recently you will have experienced this firsthand with desirable properties receiving dozens of above-asking-price offers on their first day on the market.    Selling a business is, of course, many times more complicated then selling a house but the principal of competition is the same.  Sellers have more leverage and achieve a better outcome by making the process competitive.

Buyers Are Increasing Their Direct Outreach

In order to avoid bidding on companies through an M&A process and paying historically high prices, buyers have increased their direct outreach to sellers in an effort to develop “proprietary deal flow”, meaning M&A opportunities that the buyer has developed and is pursuing exclusively, without competition.  The buyer’s desire is to establish relationships with sellers and engage them in discussions before the seller hires an advisor to take the business to market.  Why?  Because by doing so, they avoid competing with other buyers, and they have a chance to acquire the company for a better price.  To achieve this, Private Equity Groups (PEGs) have increased their internal business development teams to focus on lead generation, or have outsource this function to search firms that will do this work for them.  Strategic buyers have also upped their direct outreach efforts to business owners.  The result is that the email inboxes of business owners are increasingly cluttered with invitations from buyers to engage in M&A discussions.

Should You Talk With A Buyer That Contacts You Directly?

If you are considering talking to a buyer that contacted you directly it is important to first determine whether there is genuine and specific interest in your company, or if the inquiry is just a broad-based solicitation by a finder or a search firm.  Here are a few suggestions:   First, make sure that the buyer has been clearly identified.  You may be contacted by someone that claims to “represent a buyer in your industry” but the reality is that they are simply a finder.  If the person that is contacting you “on behalf of an interested buyer” has an exclusive agreement to represent a specific buyer, then they should be willing to tell you who they are representing.  Second, do some research to make sure that the business combination between your company and the buyer would actually make sense.  Some search firms compile lists of targets based on SIC or NAICS codes.  They send out hundreds of emails to a general list of companies and often times they are way off the mark.  Only after wasting time and effort do you find out that the buyer was never really interested.  Finally, if everything checks out and you decide to engage in a discussion, make sure that you have a solid non-disclosure agreement in place.  Of course, you should be working with an investment banker at this point but if you choose to go it alone, then at a minimum you should engage an experienced M&A attorney to provide advice and counsel.

This Has Been Positive For CenterPoint

You would think that the increase in direct-to-seller targeting would have a negative impact on investment banking firms.  It turns out that the opposite is true and, in fact, it has been very positive for CenterPoint.   Over the past few years, many of our client engagements are the result of business owners first being contacted directly by a buyer. The owner, after working with a buyer for a period of time, eventually realizes that negotiating and structuring transactions is a very involved and complicated process.  They eventually reach out to us for guidance (often at the advice of their attorney) and engage us to manage the process.

Have you been contacted by a buyer and have questions about how to proceed?  Give us a call or send me an email at SCOTT@CENTERPNT.COM. We’d love to hear from you.