December 4, 2017
By Larry Reinharz
I met with a prospective client last week, we can call him Harry. Harry has grown a successful marketing company and after 25 years is ready sell and move on to his next chapter. The business has been successful, consistently earning $1 – $2 million in profits annually for the owner. Harry has evolved his pricing model and scope of services to reflect changes in the market; maintaining the same model and services over the years would have spelled disaster for the viability of the company.
Harry was intrigued by our confidential, broad-based global marketing approach for his company, but wondered out loud if a more specialized approach made sense. He said, “A firm that specializes in my industry will have a better sense as to how to position my business to buyers.”
Not an uncommon view. Many business owners we speak with share this view.
The question is, which buyers and how many?
Customarily, firms specializing in an industry go to a deeply researched, pre-determined list of buyers, anywhere from 50 – 300 buyers in total. When they create the marketing materials, they’re going to focus on key attributes that will excite this narrow buyer pool. In contrast, our firm customarily approaches 6,000 – 10,000 buyers globally on a confidential basis; this list also includes anywhere from 20 – 300 deeply researched buyers. The companies we sell generate anywhere from $5 – 150 Million of revenue, so think about all of the buyers globally that can acquire companies in this size range!
So how does this play out?
Earlier this year we sold a $60 million service company to a strategic buyer. We approached 7,100 buyers on a confidential basis, of whom 68 signed confidentiality agreements and received books and videos on the deal. From this pool of buyers we obtained 5 offers and closed a deal that exceeded our client’s expectations. About 18 months prior, the client had hired a well-known firm that “Specialized in his Industry.” That firm approached 69 buyers of whom 11 signed confidentiality agreements and received books (no videos). No offers were received from this buyer pool.
I shared this story with Harry. “Yeah, I get it,” he replied. “But an industry focused firm may position me more acutely since they’ll have more industry knowledge.”
The issue is they will tightly position the company towards that small set of buyers they’re approaching…that’s who they’re thinking of and nobody else! They’re not thinking of peripheral buyers or buyers that make no logical sense – for example:
A couple of months ago we sold a $12 million trade organization at 13x EBITDA, the next best offers were 8x. The ultimate buyer was a payment processing business owned by a $64 billion private equity group. To this day we and our former clients do not see the fit. What we did see is that the payment processing company wanted our client’s business so badly, for their own reasons and not what brilliant Investment Bankers were telling them, that they paid 13x EBITDA cash at closing. This was a 62% premium over the 2nd best offer.
One of the reasons Harry has been successful is that he has tweaked and changed his business to reflect his evolving market. The only constant is change, so going to the same or smaller buyer pool time after time will not yield the best deal in the market.
In order to see a buyer’s best offer, buyers need to feel pressure. They need to fear losing Harry’s beautiful company to somebody else. The payment processing business that ultimately paid 13x EBITDA had submitted an initial offer of 8x – it was the competitive process that moved them up to 13x. The more horses in the race, the better for Harry.