Any company or investment fund which has recently undertaken an acquisition is a potential acquirer. The vendor should search out any acquisitions which have been undertaken over the last several years. Any company which has been through a successful acquisition could be interested in looking at another acquisition, especially one which is well prepared and has good profit potential.
The vendor can often access this information through public sources. Certainly a professional services firm which has a mergers and acquisition (M&A) practice should be able to obtain details of these transactions. The vendor might also be able to gain information on such acquisitions through industry networks.
While many transactions are made for stock, the majority of smaller acquisitions are made for cash. Thus a larger company within the industry which has a healthy cash surplus might be interested in looking at an acquisition if presented in the right light.
A lot of companies are wary of acquisitions because they often don’t have the expertise or management time to undertake the due diligence and integration process but a firm which is well prepared might be able to overcome that resistance with a convincing case.
A public listing is often a forerunner to an acquisition program. Companies which have listed on a public market need to maintain growth in revenue and profits to capture the interest of the public investor and to maintain and increase their share price. In fact, many newly listed firms are quite open about seeking acquisitions.
These companies can be approached and a tentative discussion started. While they are consumed with their listing, they probably won’t wish to pursue the discussion actively, however, sometimes they wish to undertake an acquisition before going public to gain greater attention or have the acquisition in the pipeline for a time soon after the listing to gain traction.
Some companies openly announce an acquisition or consolidation program in order to gain the attention of potential vendors. Clearly it is easier for them to have a discussion with an owner who is open to an acquisition than to knock on doors randomly. An approach can be made to them directly or via a professional advisor.
Details of the selling business can be passed to them confidentially by a professional advisor without providing identification information to see if they have an active interest.
Larger companies which sell off part of their business often do so to rationalise their operations. At the same time, they often wish to expand their core activities and have the cash from the divestment to finance new acquisitions.
Professional advisory firms normally have information on divestments and can advise whether the funds are being used to pay down loans or to make future acquisitions. Again, a discreet inquiry directly or through a professional advisory firm can be made.
A firm which has recently been sold which is similar to yours may have had several potential buyers, only one can be successful. The prior owners may be willing to pass your details on to those who were not successful since clearly they are in the acquisition process and looking for your type of business.
The entrepreneur may also be willing to advise you on which ones are the better ones to deal with.
Acquisitions are often made by entrepreneurs seeking to expand by buying a similar business in another geography. Since they already operate a similar business, they know what they are getting into, understand the market, the target customer and the risk of working within the sector. They may not have publicly expressed a desire to expand through acquisitions but may be interested if the right proposition presents itself, especially if the vendor has created an efficient business which can be managed at a distance.
Scanning customers to find another company which sells complementary products or services to them will often indicate a potential buyer who can
capitalize on knowledge of that customer sector. They may be able to cross sell products or utilise their own distribution channel to introduce new products.
Some industries have a real shortage of qualified staff. A business which has a desire to expand may be frustrated by not being able to recruit good staff. An acquisition might be attractive to them if it comes with some employees who can be used more widely across the business or can fill important executive positions in the larger entity. A business which is increased in size through acquisitions might also offer their existing staff more career prospects and thus retain employees who might otherwise leave.
Management buyouts are quite common where the owner is prepared to wait for all or part of the purchase price. Often the sale will be secured on assets of the firm or the assets may be split with the owner holding title to a building or other property.
Additional debt may be raised from the business to assist with the buyout. The difficulty many owners have with this type of sale is that the payout may well depend on how well the business performs after the sale. The profits from the business may be used to fund the buyout or the retirement of personal debt which has been used to finance the sale.
If the business gets into trouble, the funds may not be realised to finalise the purchase. The owner may have to come back into the business or find another buyer for a company which is failing.
Retiring executives, or executives wishing to make a change out of a large corporate business, are often very interested in buying a smaller company where they can build wealth through capital gains. However, these individuals don’t normally advertise that they are looking and therefore you need to actively network within the industry to have your name brought to their attention. Promoting your company in the trade journals through public relations activity, writing articles and advertising can help establish your name with interested parties. Being active at trade functions and getting involved in trade association activities will also help bring you into contact with other business owners and industry executives.
Large corporations often retrench in downturns and will often make generous payments to senior executives they wish to let go. If you know of this happening, you might contact their HR department to see if they would be willing to provide you with a list of introductions. You might be interested in hiring an executive or in taking on a possible General Manger who, in time, could buy you out.
Most often businesses are bought through some personal connection.
This could be within the industry, through a trade association, a charitable organisation or through business contacts in your local community. You should be casting the net reasonably wide to give yourself the best opportunity of finding the right buyer.
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