MBB From Brian

Finding the perfect buyer or business.

April 04, 2016

Finding the perfect buyer or business.

It’s commonly understood amongst business brokers that a buyer will rarely find the perfect business or that a seller will find the perfect buyer. Unrealistic expectations can lead to deal paralysis or difficulty in closing a transaction when each side holds out for a better deal or a more qualified buyer. The reality is that perfection is more an unrealistic expectation by buyers and sellers than any attainable qualities of either party. If you are a buyer looking for an acquisition or a seller thinking of selling you should be prepared to make compromises to get a deal done.

To simplify let’s discuss the “3 criteria, pick 2” approach. In other words, there are 3 general qualifying criteria for both buyers and sellers and they’ll probably only get 2 of them. What are these criteria? Let’s call them “Type”, “Terms” and “Risk” (Buyer or Seller “TTR”).

Buyer “TTR”:  (Business Type; Terms of deal; Risk profile of business)

Business Type: Buyers generally have a specific industry(s) or business they are searching for, but having too narrow a focus may preclude them from finding the right deal. Thinking outside the box or identifying synergistic businesses that meet your needs can open up new and interesting possibilities.

Terms: Obviously most Buyers want the best deal possible but a deal is more than just a fixed price or cash at close. There are many ways to structure a deal and to share risk between parties. Remember that it has to work for both sides.

Risk profile: Owning and operating a business is an active investment and comes with risk. Certainly there are businesses with solid track records, recurring revenues, protected IP or markets that make one business more consistent than another, but you can never completely eliminate risk. Looking for a business that’s completely “risk free” is a fool’s errand—and if you find one, expect the price to be commensurate with that low risk.

So let’s use these criteria in a hypothetical situation.

Buyer A contacts a broker or intermediary. They are looking for a mid-size manufacturing firm of consumable goods with long term contracts, recurring revenues, management in place, EBITDA of $1 to $2M and they are willing to pay a 20-25% CAP rate (4-5x earnings), offer 25% cash down with the remainder a seller note secured by the company’s assets.

We get these buyers all the time and I generally have to explain to them that something has “got to give”. In short, they are looking for a specific business, relatively little risk in earnings, want to risk little capital up front in down payment and then the business funds the seller note. Who wouldn’t want a deal like that! When we do get companies that fit this profile we rarely have to go out to the open market—a few calls and it’s under contract. If the buyer wants a great business (Type), with relatively low risk (Risk), they’ll have to pay for it (Terms). They get 2 but not all 3. If capital is a concern than they’ll probably need to compromise on the risk profile of the business (distressed, in transition or late stage lifecycle) or look outside the specific business or industry. Again: 3 Criteria, you’ll probably only get 2.

So how about Sellers? It’s not unusual for a potential Seller client to offer their thoughts on the best buyer for their business:

Seller “TTR”:  (Buyer Type; Terms of deal; Risk profile of buyer)

Buyer Type: Sellers usually have a picture in their mind of the perfect buyer for their business. They want a new owner that will continue to grow their business, look out for their long-term and loyal employees and share their same values and ethos.

Terms of Deal: Of course, sellers want the maximum value for their business and would like all cash at close. It’s unlikely that a deal will be full asking price in cash at close. Most deals are structured so the buyer and seller share some part of the risk: usually through some form of seller financing.

Risk profile: Sellers want a buyer that is both financially qualified as well as skill qualified to run the business. If they do have to provide some seller financing, they want a highly qualified buyer, a 1st position on the note or solid security.

Seller A decides to sell his business. He tells me that his business would be perfect buyer for a younger couple with corporate backgrounds, combining management experience and online marketing. They should have a net worth of at least $2M and be able to qualify for financing and a credit line of $1M. Given the rural location of the business, they should enjoy the outdoors and winter activities!

While I don’t disagree that would be a great buyer(s) to find for the business, I don’t want to close the door on any potential acquirer! Often the buyer that’s the best fit (Type) lacks the financial resources (Risk) and the best qualified buyer will make the lowest offer (Terms). A seller will need to think about which criteria are the most important and where they are able to compromise. Selling to a key employee or finding the best fit will probably require the seller to assume more risk and hold paper to get to a close. A low risk all-cash deal may require to accept a lower price or sell to a less desirable buyer.

In the end, it’s important for both buyers and sellers to realize that finding the perfect buyer or business will require keeping an open mind, understanding which criteria are the most important and being willing to compromise.

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