The influx of private equity money in the building industry has led to record deal making, ongoing consolidation and an active market for companies like yours. It has also brought another change – the increasing level of inbound solicitations from buyers and their representatives. Owners’ voicemail and email inboxes are full of outreach from brokers and buyers looking to purchase businesses. Should you respond to this unsolicited interest? It’s easy when you are running a business full time, especially when you know the low probability of a deal panning out or if you aren’t for sale, to immediately chuck these inbound offers into the digital trash and ignore the outreach. It’s also easy to be flattered by this interest and waste a whole lot of time.
Here is our take on how to think about and navigate the inbound offers to purchase your company.
Keep a Record of Inbound Solicitation. Even if you aren’t looking to sell anytime soon (and especially if you are) keep a record of who has reached out to you in the past and of any conversations you have. A simple dedicated folder in your email system is a good way to file all of these away and ensure you have a list of people who have expressed interest when and if the time comes to explore a potential sale.
Understand Why They Are Reaching Out For You. Private equity firms and some strategic buyers have a mandate to acquire or invest in businesses. They work for their investors/shareholders, and acquiring businesses like yours has a long track record of making people a lot of money. These firms seek to acquire you and grow your earnings, see you as underperforming or undervalued, an important player in a key market or offering a service they want to own in an industry consolidation, and/or just a business in the right place at the right time to invest in for the current market cycle.
Know Who You Are Talking to and What You Can Learn from Them. If you choose to take a call or meet an interested party, it’s important to understand who they are and what you can learn in a conversation. You have a business to run, your time is valuable, so make sure the effort is worth it.
Most of the private equity firms who reach out for you know nothing about your business and little about our industry. Private equity will sometimes do this outreach themselves but will often hire brokers or investment banking firms to help with this outreach, so it may not be clear exactly who is behind the effort. They usually take a “spray and pray” approach to outreach – calling and emailing from large industry databases in an indiscriminate manner. As a private equity firm, the thinking on this approach is to plan on 10 out of 100 companies contacted to respond, hope to submit loose offers on a handful – and maybe get one (1) deal done when it is all said and done for about a 1% success rate. This is not a great return on time.
If you are going to spend the time, private equity firms can be a good source of information. Owners can ask what valuations these firms are paying (typically expressed as a multiple of EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization) for businesses like yours, and the rationale behind why there is interest in the first place. You can also try to elicit information on how they run their portfolio companies, what options are for existing owners and employees, what the interested party can bring to the table to further growth and expansion, and how they think about important things like company culture and branding.
Conversations with strategic buyers (companies already operating in the industry with or without any private equity affiliations) are a different matter. You know who they are; you see them at industry conferences, their names are in industry rankings, and the news is littered with them acquiring businesses like yours. These conversations, if kept confidential, are usually worth the time.
As a CEO or owner, knowing what is happening outside of your business is part of the job. The quid quo pro for speaking with strategic buyers is you get to understand a little about their intentions, and in return they get to understand yours. You can probe the seriousness of their interest and how it may impact your market, gain insight into potential valuation expectations, and whether they might be a good fit for your company. Even if you do not act on this information, this is good information and a relationship to have.
Beyond Information Harvesting, Understand What You Are Getting Yourself Into. For the select few, and it does happen, you may like what you’ve heard and want to consider a potential offer from one of these groups. Fair enough, but don’t go it alone – here’s why:
Private equity firms and corporations employ specific people, in some cases teams of people, or pay investment bankers to reach out for owners of businesses like yours. They would not do so if it wasn’t in their financial best interest. The investment for this outreach is wildly profitable if the buyer can secure what is referred to as a “proprietary” deal, which is a moniker for a deal which doesn’t have any competitive tension from an auction run by someone like Anchor Peabody. Proprietary deals almost always trade below market value and not just in cash, but in the legal terms and structure of the transaction. Buying a deal below market, even if for only 0.5x savings with favorable terms and/or structure is great return on investment for them – this is why your inbox is inundated with calls like this.
Know that if you engage in this exercise alone, aside from claiming you don’t have to sell (most of you don’t) you have little to no leverage and no backup plan to turn to if the buyer starts changing the deal if you truly want to sell. Perhaps most importantly, while you work on this potential opportunity to transact, you won’t be focusing 100% of your time on driving earnings (the buyers know this, too). Your earnings could fall in the middle of the process – which the buyer would take into consideration (i.e. a purchase price reduction), and since most of these unsolicited offers often don’t work out, you may have only hurt yourself in the process.
Never Share Company Information or Sensitive Data Without an NDA. There are competitive concerns owners should be aware of in any conversation with a potential suitor. Information is currency, and owners should be careful about divulging any data before a non-disclosure agreement (NDA) is in place. Some buyers will use these interactions as a means of “kicking the tire” and seeing what they can learn about a potential competitor, even if no deal is struck. Owners and executives should not disclose revenue, profitability, customers, buying agreements, margins or any other potentially competitively sensitive data before the appropriate safeguards are in place to ensure such information cannot be shared with other parties or used in any way to harm their businesses.
Don’t Be Fooled by the Headline Number. You may receive an unsolicited offer that looks great on paper but be prepared for the complexity of a transaction and all that comes with it. An initial offer may appear enticing on its surface, with a value for your business that you would be happy to receive. However, there is much more to consider in terms of deal mechanics and structure. How much of the purchase price will be upfront cash vs. later payments? Does the buyer expect you to reinvest a portion of the proceeds into the business? What level of working capital is the buyer expecting to be delivered at close? Does the buyer have a history of offering attractive values and then re-trading at the last minute? What are your options if this deal falls apart? These are important questions to navigate that determine the ultimate economics of the deal and how much the seller walks away with.
Understand the Value of Your Business and Periodically Weigh Your Options/Future Plans. It is difficult to evaluate an offer in a vacuum. Before responding to any interest in your business, you should understand where the market is, what other businesses are trading for, and how you stack up in terms of growth, margin, infrastructure, systems and employees. Sell-side advisors like Anchor Peabody can quickly provide views on valuation and positioning, and help you understand if any offers are competitive given the strengths and opportunities of your business.
Additionally, just because you aren’t interested today doesn’t mean contemplating a deal and all it entails isn’t worth it. Every business transitions someday, either to heirs, a new third-party owner, or to wind-down and extinction. Once a year, owners should think about their long-term plans and what they want to do with their business when they are ready to part with it. High levels of inbound outreach indicate that the market for these businesses is active. These windows of market activity open and close with investor interest, industry structure and the strength of the broader economy and the specific sector, and there is no guarantee that valuation and levels of interest will be the same tomorrow as they are today.
If you are less than 3-4 years out from a potential exit, it is probably worth taking some time today to hear from potential buyers, thinking about what your goals are, and determining what, if anything, you should be doing to prepare your business for sale.
Most Importantly, DON’T Go it Alone. The harsh reality is you spend 100% of your time running your business and the people looking to acquire your business spend 100% of their time doing deals. You are at a distinct disadvantage right out of the gates just from a sheer knowledge and time standpoint. You don’t know what you don’t know, you are distracted by the need to run your business, and if you aren’t in the market everyday – it is impossible to understand what is fair and what is not.
Consider this: Private equity firms, extremely sophisticated financial people who have the knowledge and capability to sell the companies they own almost always decide to pay an investment banker to help them transact. Why? Their mandate is to invest in and acquire great businesses. They know their time is better spent improving the businesses they own and looking for more to buy instead of trying to save some money going it alone. Private equity firms also know the competitive tension created by hiring an investment banker – especially one who has industry knowledge to be additive to a process – who is incentivized to drive the price, structure and terms for a deal, covers the investment banking fees in many cases 2x-3x over. If the most sophisticated people buying and selling companies don’t go it alone, why would you?
Sale transactions are complex processes and sellers can and do get taken advantage of. Many buyers will say they prefer two-way negotiations between themselves and a seller, and in some cases will insist on doing so. Don’t fall for this. If a buyer has sincere interest in acquiring your company, they should respect your desire to make sure you have no regrets. Even if the offer is extraordinary, you will never know what is possible until you test the market. Also, once you sign the offer there is usually a 2-3 month time period for diligence. Having no “backup option”, yet another reason to hire an investment banker, to keep your buyer honest should they try to change the deal means you have lost a significant amount of leverage as both sides will begin to spend real money and time trying to consummate a transaction.
Sellers who are seriously contemplating a deal should secure both legal and financial/strategic representation. Anchor Peabody or another investment banking firm like us ensures your sale process is competitive, your value is optimized, and you walk away happy with the outcome. Hiring the proper legal counsel will ensure that definitive documents are well-negotiated with market terms that protect the seller.