SME owners often think they know the likely buyers for their business, but many are surprised when they actually go to market. Often, the unlikeliest buyers have the strongest motivations to buy and will support much better valuations than obvious buyers will.
Ignoring unexpected possibilities leads vendors to undervalue their business and ‘leave cash on the table’ when they sell.
Some owners don’t realise their business is saleable at all – or could be with a little work. Many businesses are shuttered or run down to let owners retire, just because they didn’t know the value of what they had or simply failed to prepare properly (more on that another day).
A little open-minded thought and outside advice can open owners’ eyes to possibilities that make a huge change in their results – and their lifestyles.
A few recent examples in the Australian ICT M&A market:
A small local implementation partner specialised in a single product from a multinational software vendor’s portfolio. The vendor, however, offered significantly higher commission rates to partners handling a wider range of their software. We ultimately found another partner that could increase their revenue dramatically by acquiring our client to extend their portfolio coverage. The cost of acquisition was small by comparison, allowing a great deal for the vendor while still providing huge benefits to the buyer.
A domestic software vendor was well aware of prices paid for competitors that had sold to larger players in the same market. Foreseeing a similar result, their expectations were reasonable when the time came to sell the business. By casting a wide net, we were able to identify an American business that was keen to enter the market, at a time when the value of the Australian dollar had dropped dramatically. While domestic buyers were still working with the same valuations, the international buyer was much more flexible, owing to their additional buying power, and the vendor achieved a much better result.
Another vendor was very concerned about the market coming to know that the business was ‘for sale.’ They sought to carefully constrain the range of prospective buyers contacted about a potential sale, expecting that the known buyers in the market would be their only potential acquirers. As a 3rd party, we could ensure approaches were conducted on a ‘no names’ basis until serious interest was established and we convinced them to allow us to talk to their key customers as well. Their key customer was keen to extend their market and saw the opportunity to combine their purchasing with the vendor with the acquisition price to support a significantly better valuation than was available from the more obvious buyers.
These and other examples show the importance of ‘casting a wide net’ when it comes to prospective buyers, particularly for smaller companies. There are a lot more buyers who could handle and $2M deal than a $20M deal. As a result, valuations for smaller deals tend to show much more variation and the impacts of finding a more motivated buyer can be dramatic.
It’s important to keep an open mind when drawing up your ‘long list’ of people to contact about a potential sale. Some of the obvious prospects to consider include:
- Anyone that has purchased a business in your space or of your type in the recent past
- Customers and potential customers where ‘vertical integration’ might make sense (to them) and/or if you have a key or anchor customer with mutual dependence between companies
- Suppliers and potential suppliers to extend or control more of their own supply chains, particularly if you are a distributor or channel partner, or focussed on one product
- Competitors and potential competitors looking to extend their presence in the market and/or build the overall scale and value of their own business
- Complimentary providers of allied or related products or services to your customers, or customers similar to yours, who might seek to integrate your respective customer bases
- International or regional potential competitors, whether they are active in this market or not
- Businesses in other markets with a related business model seeking ‘horizontal integration’
- Overseas companies that might enter this market, particularly if your business has sufficient scale (A$10+M revenue, generally) to be a viable as a market entry and/or if your product or service could be taken into overseas markets as well
- Private Equity, Venture Capital (PE/VC) or other investors, where your business has the potential to support aggressive growth with professional management
- Staff and management – current employees who might support a Management Buy-Out of Buy-In (MBO/MBI) on their own, or with appropriate investor backing
- Owner-operators – someone looking to ‘buy themselves a job’ (yours), particularly for smaller businesses that might suit someone retiring out of a corporate position
- ‘Product stable’ operators – firms that specialise in buying and operating firms or products like yours (for example, several specialise in buying up ‘mature’ software businesses)
- Consolidators seeking to build larger companies by combining a number of smaller ones, either integrating or ‘federating’ the businesses for economies of scale
- The public via share market listing on the ASX or other public market, for businesses that are large enough
An open brain storming session and some research using a list of ideas like this can often generate a list of prospects many times longer than our vendor clients initially expect. Lots of the entries on that list are going to be ‘long shots,’ but it doesn’t cost much to approach them, and when one pays off, the value can be well worthwhile.
This highlights 3 of the key benefits of using an external 3rd party M&A advisor like ICT Strategic Consulting:
- Objective and open-minded approach to expand your own thinking
- Able to approach many prospects without distracting you from running your business
- Confidential 3rd party that can approach sensitive contacts on a ‘no names’ basis