Creating competition among buyers drives value in the M&A process, so constructing a quality buyer list is a critical step in the preparation and planning stages of selling a company. A well thought out buyer list significantly increases the chances of completing a successful transaction. At CenterPoint we spend countless hours identifying, researching, and qualifying potential buyers to include in the target buyer list for our clients.
Below is a brief overview of four primary types of buyers to consider:
1. Strategic Buyers
Most business owners have a sense of who some of the top buyers are, and in many instances they may have already received inquiries regarding a potential acquisition. Typically these buyers include larger competitors, suppliers, customers, or companies in related industries. In the world of mergers and acquisitions these types of buyers are known as Strategic Buyers because they have a strategic interest in acquiring the seller. Strategic buyers evaluate acquisitions based on what the selling company will be worth under their ownership taking into consideration factors such as revenue growth opportunities and cost savings of the integration.
2. Private Equity Groups (PEGs)
PEGs are investment firms that acquire privately held companies. Their financial backing comes from several sources including pension funds, wealthy individuals, financial institutions, etc. The PEG raises a “fund” of committed capital to acquire companies that meet the criteria outlined in the fund’s charter. PEGs commonly make an initial “portfolio” acquisition in an industry, and then grow that business through the addition of capital, organic growth, and add-on acquisitions. PEGs evaluate acquisition opportunities based on the seller’s cash flow, growth opportunities, and strength of the management team. In addition to acquiring 100% of a company, most PEGs will also consider partnering with the seller whereby the PEG will acquire a majority interest (51% to 95%) while the seller maintains a minority ownership. This allows the seller to achieve liquidity at closing but also participate in the future growth of the company. PEGs plan to own a company for 3 to 7 years, grow the business, and then ultimately sell it to a strategic buyer or to another PEG. There are thousands of PEGs operating in the U.S. with hundreds of billions of dollars in buying power.
3. Portfolio Companies of Private Equity Groups
A PEG portfolio company is a strategic buyer that is already owned by a private equity group. You may be surprised how many of the companies that you interact with everyday are owned by PEGs. Private Equity portfolio companies are often ideal buyers since they have a strategic interest in making acquisitions and have the financial backing of the PEG.
4. Family Offices
A Family Office is an organization that manages the financial affairs and investments of an ultra-high-net-worth family. In recent years family offices have become more active in the M&A space and have been acquiring privately held companies. In some ways family offices are similar to PEGs. A key difference between family offices and PEGs, however, is that family offices do not have to answer to any outside investors. They have the flexibility to hold on to a company for an indefinite period of time rather than having to divest the company in a 3 to 7 year time frame to return capital to its investors.
What does a typical buyer list look like? Just like everything else in an M&A process there is no “typical”. The buyer list must be specifically tailored to the selling company based on its size, industry, geography, growth rate, etc. Some companies lend themselves to only strategic buyers while others are better served by including broad a pool of both strategic buyers and PEGs.
For example, in one of our recent transactions the buyer list was very broad. We included 213 private equity groups and 26 strategic buyers. At the conclusion of the process we received 14 offers. The ultimate buyer was a portfolio company of a PEG. In another recent transaction the target list was much more focused. It included only 13 strategic buyers and we received 5 competitive offers.
About half of the transactions that we have completed in the past decade have been sold to strategic buyers and the other half to PEGs. The important takeaway is that a seller should consider all options simultaneously in order to achieve the highest valuation and most favorable transaction structure, which should include a thorough evaluation of both strategic buyers and Private Equity Groups.
Have questions? Want to learn more? Give us a call or send me an email ( scott@centerpnt.com ). We’re always happy to talk.