Before agreeing to represent a new client, I ask myself two critical questions. The First is; will my efforts to prepare the company for sale result in increased profitability, better management tools, opening new markets, retaining key employees, and other metrics by which the potential client will gain more value than the cost of my services? Fortunately, the answer to this question is fairly easy given my experience. If the client is willing to take my advice, then my services will more than pay for themselves – even if the business ultimately does not sell.
This leads me to the second critical question, “Can I legitimately identify buyers having an interest in this business?” This is a much tougher question to answer because each business and industry is different enough from the last that there isn’t a pre-subscribed list of potential buyers one can reference for every deal.
There are, however, some rules of thumb that I’d like to share with you that help me address this question. The intent is that with these rules in hand, you will know where to start. You can then create a list of potential buyers and segment them into categories from which you strategize about the most effective approach that protects your interests and competitive information.
The first rule of thumb is that your most likely buyers are right under your nose. I work with business owners to list out their key employees, family, friends, college buddies, and service providers to consider whether or not they have ever expressed an interest in owning a piece or all of the company. The conversation with key employees needs to be carefully scripted so as not to spook them, but the rest of the business owner’s network makes for some relatively comfortable and easy introductory conversations. Incidentally, these conversations can also lead to a series of additional buyers culled from their networks. This is especially true of your advisors such as CPAs, Attorneys, Insurance Brokers, etc. Because they work with business owners across many businesses and industries, it is probable that their client base could yield a number of prospects.
The second rule of thumb is that your suppliers, customers, and competitors are likely prospects as well. Small business owners usually already have a list of competitors in mind when they come to me to sell, but they usually haven’t listed out their entire supply chain as potential opportunities. For example, if you run a gallery and happen to sell a number of pieces by a specific artist, that artist may want to buy the gallery space to allow him or her to better showcase their work, and to earn commissions off the sale of other artists (I’m sitting on the shores of the Cove of La Jolla writing this, so forgive me if the example seems incredibly niche – but there are at least twenty galleries within a chip shot of my laptop).
The third rule of thumb is that the internet is the best possible window to the marketplace you could ever need, and search engines like Google are perfectly designed to provide you with an array of potential prospects. I once worked with a company in the beverage industry. Between myself and a friendly intern, we were able to identify more than fifty potential buyers, complete with executive’s names, contact information, and often emails and phone numbers with just over an hour’s work. Once you feel like you have the narrative down regarding the value proposition your company would provide to a new owner, give one or two a call. You’ll likely spend most of your time talking to receptionists and gate-keepers, but I have found that if a small business owner has any inkling of desire to grow through acquisition, they are likely to return the call. And if they don’t? It’s just a couple minutes of your time in making the call and leaving a message.
In my experience, it usually takes about 100 prospects to yield a single real buyer. You want more than 1 (and best to have at least 3) to ensure that you have a competitive auction process for negotiating the deal.
If, by following these steps, you have not procured a list of 100 potential contacts, then it’s likely time to bring in a professional who can expand upon your lists through his or her expertise, relationships, and network. Advisors will know intuitively and through experience what types of buyers have an interest in companies at various revenue and earnings sizes. They also know how to quickly prepare and place the minimum documentation required to generate interest among potential buyers. Additionally, their network of relationships often turn up financial or institutional buyers most small business owners cannot effectively access.
So back to the second critical question – if I can’t establish a list of more than 100 potential buyers, then the time may not be right for the company to sell for both external and internal reasons; perhaps it’s the economy, the market, financing opportunities, or maybe the company is just too small, too leveraged, or poorly managed. Sometimes the best advice I give is not to sell… and the leading indicator there is often the lack of potential buyers. In these cases, I advise the owners to focus on working on their business, keeping in touch, and then going to market again when the time is right.