The Inner Workings of a Deal: Tips for a Successful Transaction Part IV – Marketing Your Company
Last month, we reviewed the pros and cons of hiring an intermediary to assist you with the sale of your company, as well as evaluating the differences between types of intermediaries and the issues that will come up in retaining them. Last Article
This month, we’ll start the process and begin marketing your business in earnest.
Preparing a Marketing Book
Once you’ve retained him, the first thing that an experienced M&A advisor will do is prepare a “book” (sometimes known as a Confidential Information Memorandum or “CIM” for short). This book will be distributed to potential buyers and help them understand the value proposition that your company represents.
Be patient! A lot of work goes into a good book, and since you only have one chance to make a first impression on potential buyers, you’ll want the book to be complete and accurate and to present a positive preliminary view of your company.
In drafting a marketing package, your advisor will want to get a large amount of information from you. I try to do four major things in these materials:
Tell the Story: Buyers are ultimately buying people, so it is important to tell the company’s story and the story of the key people. Explaining how the company started and grew and why the business is for sale is crucial to getting potential buyers interested in an opportunity. This section should convey your goals, whether those are retirement or future growth, as they will impact what sorts of buyers will be most interested in your company.
Provide a Meaningful Financial Summary: Despite my statement about buyers buying people, their analysis starts with financial information. The book should contain a three to five year financial summary (three years is sufficient, but five is better if the history trends upward), along with an addendum which includes the company’s financial statements over that time period. If your financials aren’t reviewed or audited, your advisor may suggest that you have an accountant perform a “Quality of Earnings” review prior to starting marketing efforts. You should seriously consider investing in this mini-audit because it will enable you and your advisor to flush out any issues that will otherwise be revealed during a buyer’s due diligence. Better to proactively deal with potential issues than have them thrown at you by buyers during negotiations.
Explain the Company’s Operations: The largest part of a CIM is often a description of the company’s operations – employees, customers, vendors, sales, marketing, manufacturing, etc. Buyers will quickly identify risk issues in the company or the transaction, so it is best to highlight any issues at the outset. Risks common to middle market companies include concentrations in products, vendors or customers, or a heavy dependence on certain relationships.
Provide Future Opportunities: Buyers buy companies based on their historical profitability, but seek growth to justify the acquisition. Consequently, your M&A advisor may ask you to forecast the next few years of operations, and will certainly ask you how the company can be grown over the same period. Not every company is capable of creating projections, but if you can, it will set your company out from others that aren’t as able, potentially adding value.
Who Should You Market To?
While in some transactions, you might be able to predict the buyer with some level of accuracy at the outset, in most cases, I personally find that I don’t have a very good crystal ball. Consequently, I advise my clients to be flexible and to market broadly.
Generally, middle market companies should be marketed to two broad groups of potential buyers: financial buyers and strategic buyers. Financial buyers tend to be professional investors that don’t have deep operational experience. These buyers, mostly private equity firms, family offices, and the like, tend to seek companies that have existing management teams that will stay with the company after a transaction and continue to operate as a stand alone company. Many can and will add industry experts to the company in management or board positions, but generally, they don’t want to run the company on a day to basis.
Alternatively, strategic buyers are existing companies (either public or private) that are looking to add capabilities or competencies that your company can bring to them. Larger strategic buyers are more likely to roll your company up into their operations to take advantage of synergies.
Some advisors will argue that you should limit marketing to a small group of targets. I have generally not taken this approach. I mind that it is best to be as broad as possible with targeting, as I have had very good transactional opportunities arise from very unlikely buyers. While there can be risks to every marketing effort, the value of finding the right buyer usually far outweighs the risks associated with marketing to a large group of targets.
It is difficult to tell in advance who the right buyer will be. While historically, strategic buyers have had a reputation of being able to pay more than financial buyers for companies, the “right” answer largely depends on your goals.
Contacting potential acquirers is usually handled in steps. First, your advisor will contact targets in a broad, anonymous effort, whetting their appetites without identifying your company. Then, the advisor will vet buyers, ensuring that they are serious buyers. At this stage, your advisor should be entering into non-disclosure agreements with targets prior to providing them with any identifying information about your company.
Marketing your company will take one to three months (or more) from the time you bring an advisor on board. This depends on the speed at which you are able to provide him with the information he needs to put together the marketing package and the breadth of potential targets.
Making a great first impression is crucial in the marketing of your company. Selling your company will require significant effort, and the first will be to work with your M&A advisor to prepare a high-quality marketing package and to help him identify the universe of potential acquirers for your company.
Next Month: Part V – Early Discussions and Indications of Interest
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.