The Inner Workings of a Deal: Tips for a Successful Transaction
Part V – Early Discussions and Indications of Interest
Last month, we created a marketing package and began to market your company to potential acquirers. Last Article
By now, your M&A advisor has begun having discussions with interested buyers, and the real work begins.
Don’t Get Discouraged – It’s a Numbers Game
Most likely, if you’ve marketed your company correctly, you will get significant interest from both strategic and financial buyers. But, while many will initially be interested in your company, when they explore further, they will drop out of the process. This is not a reflection on your company – it is part of the education process. Potential acquirers need to learn about your opportunity, and undoubtedly, some will not find your company to be a fit for them.
Fortunately, if you’ve hired an experienced M&A advisor, he’ll be shielding you from the bulk of these initial conversations. One of the benefits of your advisor putting the book together (discussed last month) is that he’ll have learned many of the key parts of your business. Since he’ll know what sort of questions buyers will have when he is preparing the marketing package, he’ll most likely be able to answer the vast majority of buyers’ first line of questions.
What Will Buyers Want to Know at This Stage?
In my experience, the primary thing that buyers care about is not making a bad acquisition. Consequently, their initial focus will be both on whether the company is a good fit for their needs and what the significant down side risks of the opportunity are.
Therefore, your advisor will be asked a lot of questions about customer and vendor concentration, payment problems, litigation, and other potential risks. This is not because the buyer will ultimately focus on these issues, but rather because they are the sorts of issues that can cause a deal to turn “bad” down the road.
At this stage, you should expect to conduct a series of 45-60 minute calls with potential buyers. Despite the fact that your advisor will have provided a comprehensive financial and operational picture of your company in the book, buyers will want to hear the story directly from you. However, most experienced buyers should be willing to limit their review at this stage to a review of the book, discussions with your advisor, and a single call with you.
While some advisors might disagree, I generally do not price deals at this stage. Providing a price early assumes that you and your advisor understand the entire value that your company has to every buyer. Also, it assumes that every buyer will value your company at the same level. Both of these assumptions are unrealistic.
Instead of pricing a deal, your advisor (and you) should be conveying your company’s value propositions to potential buyers so that they can make their own decisions on the price they are willing to pay. While your company provides obvious benefits (products, revenue, etc.), there are often synergies that might be available to potential acquirers. Are there purchasing benefits? Cross-selling opportunities? Other synergies? These value propositions can increase a deal price greatly, but can’t always be anticipated. My best advice is to remain flexible and to listen to potential targets’ needs.
Indications of Interest
At the end of the first round of discussions (which can last for a month or two), you’ll want to separate the lookie loos from the serious buyers. I prefer to do this by requiring non-binding indications of interest. Indications of interest are usually one to three page letters introducing the buyer, describing its interest in your company, and setting out general valuation and deal parameters.
Frankly, indications of interest have virtually no real meaning, except that they require buyers to put in a little bit of work thinking about the company and its value. Consequently, they are a good way to separate the wheat from the chaff and decide who to include in a more thorough second round of discussions.
Your M&A advisor should analyze the indications of interest and make recommendations as to how many and which potential buyers to go forward with. I generally advise clients that four to six targets at this stage is a manageable number and usually allows a fair sampling of appropriate financial and strategic buyers, without overwhelming you at the next stage.
This stage of the process will be draining on your advisor and he will shield you from a lot of seemingly wasted time and effort. Narrowing down the funnel of potential acquirers is a time consuming and often frustrating process. Nevertheless, it is the key to ensuring a good field of potential buyers with whom to engage in final discussions.
Next Month: Part VI – Management Meetings, Deeper Dives, and Letters of Intent
Michael Schwerdtfeger is a managing director at Chapman Associates. Michael and his team are focused on providing exceptional results through sell-side mergers and acquisitions advisement to entrepreneurs and business owners exclusively. Michael leverages his 20 years of diverse experience handling complex business transactions to help guide his middle-market clients to the best possible deal outcomes.