Business Sellers – What are Qualified Buyers?
By David M. Kauppi, CBI, President Mid Market Capital
If you are a business owner considering selling your business most likely you will interview several business brokers or merger and acquisition advisors. In the process you might hear, "We have lists of qualified buyers." Some potential business sellers find this phrase almost hypnotic. It congers visions of this group of well funded, anxious buyers who can't wait to pay a generous price the moment they are made aware of this great opportunity.
Let's lift up the covers and look a little closer. If this is a business broker who handles main street type businesses like convenience stores, dry cleaners, salons, and restaurants, he is typically selling to an individual who is buying a job. If the broker is one that does not charge an up-front or a monthly engagement fee, he is agreeing to work for a success fee only. To improve their odds of getting some success fees these contingent fee brokers take on dozens of clients.
With dozens of clients, the broker can't really afford to engage in the labor intensive M&A process. Instead he can only list the business. Listing would include posting it on several "business for sale" web sites, placing an ad in the business opportunities section of the paper and putting the word out to his network of professional contacts and lists of "qualified buyers". These lists are the result of capturing the contact information from individual buyers that resulted from years of this passive listing process.
They have lists because these people almost never buy. Here is why. The business has to be priced low enough and generate enough cash so that it will provide debt coverage (assuming the business has enough hard assets to collateralize a loan), provide a generous return for the buyer's equity, and finally exceed their career high salary when they worked for the fortune 500 employer. On top of that, the business should have a healthy growth rate and not be in a commodity type of business.
The business brokers do qualify these buyers by requiring them to complete a financial disclosure form and a confidentiality agreement. They make sure they have some money, but they have no way of qualifying whether they will actually part with that money. Individual buyers typically pay the lowest valuation multiples when they do buy a business.
For the larger business owners that are interviewing M&A firms, this "qualified buyers" claim takes on a different meaning. These M&A firms have lists of hundreds of private equity firms with their buying criteria, business size requirements, minimum revenue and EBITDA levels and industry preferences. All M&A firms have pretty much the same list. There are subscription databases available to anyone. The better M&A firms have refined these lists and entered them into a good contact management system so they are more easily searchable.
The approach these M&A firms with these Private Equity lists employ is to blast an email profile to their list and if they get an immediate and robust response, they will focus on the deal and work the deal. What happens to the 90% of sale transactions that clearly do not fit either the minimum EBITDA and revenue requirements or the conservative valuations of this group of buyers? Those deals requiring contact with strategic industry buyers usually go into dormant status. They will not be actively worked, but will occasionally be presented in another email campaign, mail campaign or at a private equity deal mart (industry meeting where many M&A firms present their clients to several PEG's).
For the business owner that has paid a substantial up front engagement fee or healthy monthly fees, this is not what you had in mind. The way to get a business sold is to reach the strategic industry buyers. That is not easy. Presidents of companies (the buyer decision maker) do not open mail from an unknown party. So, mailings do not work. Let me repeat that. In a merger and acquisition transaction, mailings do not work.
Presidents of companies do everything possible to keep their email addresses confidential, so email blasts on a broad scale are not possible. Telemarketers are not skilled enough to pass through the voice mail and assistant screening gauntlet. If you have ever tried to present an acquisition opportunity to IBM, Microsoft, Google, Hewlett-Packard or Apple, let's just say it would be easier to get into a castle with a moat full of alligators.
The investment bankers from Morgan Stanley or Goldman Sachs can generally get an audience with any major CEO. However, the fees they charge limit their clientele to businesses with north of $1 billion in revenues. So how do $15 million in revenue businesses get sold? You need to locate a boutique M&A firm that will provide a Wall Street style active selling process at a size appropriate fee structure.
What does this mean? The approach that consistently produces a high percentage of completed transactions is the most labor intensive and costs the most to deliver. It is an old fashioned, IBM, dialing for dollars effort, starting at the presidential level of the targeted strategic buyers. It usually takes ten phone dials and a great deal of finesse to penetrate the gauntlet and get a forty five second credibility opportunity with the right contact.
If you are able to pass that test and establish their interest, you ask them for their email address so you can send them the blind profile (two page business summary without the company identity) and confidentiality agreement. This is a qualifying test. The president will not give you their email address unless they have real interest and you have established your professional credibility.
If the president is not the appropriate contact, his assistant will generally direct you to the correct party. When that happens, we update our contact management database with this information so on the next M&A engagement we go directly to the proper contact.
Our first engagement in an industry requires a great deal of this discovery process. With each subsequent engagement in an industry, we become increasingly efficient and improve our credibility and brand awareness. There is generally an advantage of engaging an M&A firm that has experience in your industry. After several transactions in a niche, we become that more efficient and effective. Our list truly becomes a list of "qualified buyers."
For example, by our fourth engagement in healthcare information technology, we know the specialty of the top 300 players, we know the lead on M&A deals, we know his direct dial number, email address, and most importantly he knows us.
So there are lists of qualified buyers and there are lists of qualified buyers. When selling your business, make sure that you engage a firm that truly has a list of qualified buyers.
Dave Kauppi is the editor of The Exit Strategist Newsletter and a Merger and Acquisition Advisor and President with MidMarket Capital, Inc. MMC is a private investment banking, merger & acquisition firm specializing in providing corporate finance and intermediary services to entrepreneurs and middle market corporate clients in information technology, software, high tech, and a variety of industries. Dave began his Merger and Acquisition practice after a twenty-year career within the information technology industry. His varied background includes positions in hardware sales, IT Services (IBM's Service Bureau Corp. and Comdisco Disaster Recovery), Software Sales, computer leasing, datacom, and Internet. The firm counsels clients in the areas of merger and acquisition and divestitures, achieving strategic value, deal structure and terms, competitive negotiations, and “smart equity” capital raises. Dave is a Certified Business Intermediary (CBI), is a registered financial services advisor representative and securities agent with a Series 63 license. Dave graduated with a degree in finance from the Wharton School of Business, University of Pennsylvania. For more information or a free consultation please contact Dave Kauppi at (630) 325-0123, email [email protected] or visit our Web page http://www.midmarkcap.com
