M&A guide for individual buyers: Establishing credibility in a crowded market

Today’s acquisition market is fiercely competitive. In the face of such competition, individual buyers – former company executives, former banking or finance professionals, experienced entrepreneurs, and even individuals dreaming of a pot of gold – are challenged to establish their credibility to business owners, investment bankers, and their advisors.

Private equity funds, independent sponsors, family offices, holding companies, and industry-focused strategic buyers are seeking to invest record levels of capital through acquisitions. At the same time, the supply of companies on the market is insufficient to meet demand. For these and other reasons, M&A industry veterans view today’s environment as a seller’s market.

More than ever, company owners can pick and choose which buyers to include in their sale process. In addition, investment bankers and business brokers pre-qualify potential buyers early in the process. Professionals such as attorneys, accountants and bankers evaluate potential buyers before referring them to a sales process or making an introduction to a business owner.

To establish credibility and succeed at acquiring a business, individual buyers should keep in mind five important points: a focused search, money to invest, a team of advisors, knowledge of the acquisition process, and effort.

 Credible buyers have…Unqualified buyers have…
Focused searchWell-defined and specific search criteria related to their area of expertise.No focused search criteria or overly broad or generic criteria.
Money to investDemonstrated source of sufficient capital to support the stated target criteria.Insufficient money available. Vague hopes of seller or bank financing.
Team of advisorsRelationships with experienced advisors to support the acquisition process.No established relationships or advisors with background or experience in M&A.
Knowledge of the processUnderstand the acquisition process and can talk knowledgeably about the milestones and steps needed to get to the finish line. Understand the importance of cultural fit with owner and management team.Lack of understanding of acquisition process and major steps. Fail to recognize importance of cultural fit.
EffortDedicating full-time effort and 100% energy to acquiring a company.Part-time effort with too many outside distractions.

Focused search

It’s important that individual buyers narrow their focus to a well-defined and written set of criteria. The first question often asked by intermediaries and professionals is “What are you seeking to acquire?” Buyers should summarize their focus in both a 30-second “elevator pitch” format, and a more detailed one-page written criteria sheet. Be prepared to provide details regarding:

  • Industry: What market segment, customer base, product or service? Be as specific as possible. Are there industries, markets or segments that are specifically NOT of interest?
  • Company size: What size company do you seek to buy? Total revenue? EBITDA or profit? Transaction or enterprise value?
  • Location: Are there geographic constraints or preferences? Are you willing to relocate or commute? Or must the company be in a specific location?
  • Equity stake: Must you have 100 percent ownership? Is 51 percent controlling stake required? Is a minority share acceptable?
  • Management structure: Are you a passive investor looking for existing management to run the company? Are you seeking to assume a leadership or other role in the business? What will be your role in the operation and management of the company?
  • Holding period: How long do you intend to own the company? Are you a four to seven year short-term investor (similar to private equity funds)? Or are you a long-term “buy and hold” investor?

Although buyers are sometimes concerned they will miss “the perfect deal” if it falls outside their stated target, the most credible individual buyers know exactly what they are looking for and communicate it clearly to others. Keep in mind, too, that individual buyers must work extra-hard to differentiate themselves from the thousands of funds and investors seeking to buy companies. Well-focused search criteria will help. Unlike established private equity funds, individual buyers don’t have the luxury of casting a wide net and instead must be specific and focused in their search to establish credibility.

Money to invest

Individual buyers must realistically understand the amount of upfront capital needed to buy the type and size of company defined by their target criteria – and have a credible and identified source for the money. Unfortunately, too many individual buyers fail to realistically address this issue. Business owners, brokers, referral sources, and bankers universally ask the question “Do you have the money needed?”

Although the amount of initial cash investment varies widely with company size, market, industry, working capital needs, capital expenditure needs, and deal structure – a good rule of thumb is 30 percent to 50 percent of total transaction value is needed in upfront capital at closing. Remember, this is invested capital and is in addition to any bank loans or seller notes.

Some buyers use personal resources, others might tap friends and family, and some might have a relationship with a private equity fund, high net worth family or other investors. Regardless of the source, individual buyers must identify and secure enough money before embarking on an acquisition search – and must be able to demonstrate it early in the process.

Team of advisors

Part of individual buyers establishing credibility in the M&A marketplace is alignment with experienced and knowledgeable advisors before starting a search. Although picking an attorney experienced in acquisitions is an obvious place to start, the buyer’s team of advisors should also include other professional services: financial accounting, tax accounting, insurance (property/casualty and health benefits), environmental, safety and real estate. Picking credible, experienced and professional advisors will provide a buyer with benefits beyond solid advice about deal structure and due diligence. Experienced professionals provide individual buyers with “credibility through association,” too.

There are many well-qualified and experienced professionals in large big name firms, mid-sized firms and small boutique firms. The name of the firm or company is less important than the background and experience of the individual advisor. It’s important to interview multiple candidates and firms (big, medium and small), to ask probing questions about experience with acquisitions and philosophy of work, to clarify fee structure and payment expectations, to verify references and to do the necessary homework.

Knowledge of the acquisition process

Individual buyers can reinforce their credibility through demonstrated knowledge and understanding of the acquisition process, including understanding the importance of matching the culture and goals of the company. Of course, industry-specific knowledge or subject matter expertise is critical to run a business successfully after an acquisition. But an individual buyer’s industry experience and subject matter expertise is not, by itself, sufficient to establish credibility during an acquisition search.

Remember that owners and intermediaries choose a buyer based on many reasons, not only valuation. The buyer’s fit with the culture and goals of the company and the buyer’s perceived ability to close the transaction according to the agreed upon price, terms and schedule are key attributes. Individual buyers must show they are sensitive to the owner, management team and company culture, they share common goals for growth and operation of the business, and they have the knowledge and skills needed to get to the finish line without surprises.

Buyers can learn from many sources. Individual buyers can find instruction about the acquisition process in books targeting either buyers or sellers, informational meetings with attorneys or advisors, panel discussions and speakers at networking events, formal seminars on the M&A process, or even informal conversations with experienced buyers. In addition, individual buyers must listen carefully to an owner’s and management team’s goals and objectives and communicate clearly how the buyer fits with their culture and goals.

Effort

Searching for an acquisition is full-time work and requires 100 percent effort. Individual buyers seeking an acquisition in their spare time, after work and on weekends, or as a not-so-subtle job search are an immediate red flag for most business brokers and referral sources. Credible individual buyers devote full-time effort to their search. They dedicate 100 percent of their time and are motivated to move the process forward.

In addition, it’s important for individual buyers to recognize that it can take more than a year to find the right acquisition and close on a transaction. With that in mind, individual buyers are credible only if they are emotionally and financially ready to put in the time and effort needed.

Summary

To succeed in the competitive M&A market, individual buyers must establish their credibility when meeting with business owners, investment bankers, brokers and potential referral sources. Buyers must ensure they are focused in their search criteria, have sufficient money to support the acquisition they’re seeking, partner with experienced advisors, have knowledge of the acquisition process, and put forth the effort needed to succeed. These key points, together with perseverance and a little bit of luck, separate credible buyers from dreamers.

Daniel Eder is an entrepreneur and investor seeking acquisitions. He recently acquired Jackson-based Reliable Door Systems Inc.

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