1. The state of the M&A market
As in other aspects of life and business, timing is a factor that is not completely in your control, but one that can make a significant difference. “When the M&A market is broadly hot, as was the case for years until recent rate hikes, it’s a prime time to be a seller,” says Berg. The current market remains strong, he adds, but there is a bias for clarity in areas that are often less important in boom times.
“When you’re in this kind of market, it’s important to anticipate the issues that can impact the perception of risk,” Berg says. “This means that planning is more important; planning to have good answers, with data, to questions around customer retention and performance, supply chain risks and the quality of the management team. Companies who are prepared to address these issues are having fewer pricing and structure challenges in the marketplace.”
Some owners make the mistake of waiting too long to both assess these areas or to explore selling the business. They may be looking to execute certain growth and operating initiatives before starting discussions with buyers. “If the company is performing well, waiting too long can be a mistake,” says Berg.
He warns that the industry in which a company operates, the broader economy or M&A and capital markets can change directions quickly. “It’s best to explore options before you have to sell or retire. Going to market with good performance and a solid growth plan works regardless of general market sentiment. The Deal Industry never shuts down,” says Berg.
2. The appeal of your industry and your business within it
A comparable consideration to the broader economic environment is the current appeal of the industry in which your business operates. Does your company serve a market that is growing or shrinking? Regardless, how is your company performing relative to its industry or peer group?
Investors may pay a premium for companies that outpace their comparable firms even in challenged industries. Outperforming them in a growth market is even better. The underlying concept is that organic growth for many is difficult and expensive. Buying a business to harness its success can result in a much more predictable return on investment for the acquirer.
“Being in the market at a time when your business is demonstrating strong growth and profitability will make you stand out, especially if your business is performing better than industry benchmarks” says Berg.
3. How to find buyers
One key to a successful transaction is finding the most appropriate buyer for the opportunity. A starting point is to determine what you’d like to achieve as a result of the sale. While many may assume that the top priority is receiving the highest possible sale price for the business, that isn’t always the case.
Perhaps you want a buyer that will provide a high degree of support for the next tier of management to help continue to produce strong results. Maybe you want to maintain continuity of business leadership within a family or among current key employees. Your priorities can often help guide you to the right kind of buyer.
Berg identifies three primary types of buyers in the market.
- Strategic. “These are larger companies in your industry who see revenue and efficiency opportunities that can be achieved through an acquisition and integration,” he says.
- Private equity. According to Berg, “These financial buyers tend to be more focused on the quality and sustainability of earnings as a platform, along with sophisticated growth strategies. Private equity firms seek both new platform investments, as well as add-ons to existing platforms.”
- Family office. “Family offices have become meaningful buyers in private transactions,” says Berg. “They’re looking for sustainable cash flows with reasonable growth.” Family offices typically fund acquisitions utilizing more equity and less debt. They’ll consider both controlling and minority positions in private companies, invest for long duration hold periods and are not actively involved in operations.
It can be beneficial to match your own objectives to the pool of potential buyers in the market. It isn’t unusual to explore all three types of buyers to seek out competitive offers for the business.
Another factor to keep in mind is that those who are considering buying your business will likely have a better understanding of how the process works. Most acquirers have experience in the process, while sellers typically have not been in this position before or only rarely. A sell-side M&A advisor can provide effective management of the sale process with the right suite of buyers, creating significant negotiating leverage for the seller.