What To Do When Buyers Call

Every business owner is approached from time to time by would-be buyers who express interest in courting you for acquisition. The way you handle those early forays can make a huge difference in the likelihood of a successful and lucrative sale. Even if you have no interest in sale today, you can use these early probes to learn much about your market place, who buyers are, and what elements of value in your company will create the most sparkle/the most dynamic competition for your company on the day you decide that it’s time to sell.

First of all, realize that 75% or more of the approaches you may get from would-be buyers will in reality be approaches from intermediaries, seeking to represent buyers who might acquire you. Early stage discussions can quickly allow you to screen and identify the nature of the caller. Ask directly in the first conversation. Are they an intermediary who represents buyers, an intermediary wishing to represent you in sale or are they a part of an equity fund or a strategic corporate buyer who thinks they may have interest in your company?

Let’s consider the last category of inquirers first. If the caller is an employee of the potential purchaser, get a pencil, take notes and ask questions that will help you understand their interest as possible buyers. Even at these earliest stages, begin the conversation by clarifying that you expect the conversation to be entirely confidential. Tell the buyer that you are not currently being held for sale, but that you always have interest in being alert to opportunities. Tell them you need a bit of background to even decide whether it’s worth talking further. Specifically, ask the following:

Why do they think the company might fit their acquisition interests?

If they are a strategic corporate buyer, do they know what you do, and seek to own that capability? Understand what they do now, and where they hope to evolve, to better understand how you might fit with them.

If an equity fund is calling, what size acquisitions do they target? What other companies do they own, or have they owned in the past, that maybe similar, and how have those companies performed for them? What % do they buy, with the acquisitions they do? (Do they buy 100%, or do they require sellers to continue to hold a percentage of the company?).

For any buyer, ask what profitability (pretax profits as a % of sales) do they think is good? What growth rate do they think of as respectable and desirable?

(Then we get to the really interesting question!).

How do they typically price acquisition targets?

Most buyers have a pre-set concept of likely pricing based on a multiple of pretax cash flow they may pay. If you do a good job of handling this conversation, you may learn of a range of possible values they may set, in later making you an offer. The best buyers will be proud to tell you that they sometimes pay a strong multiple – perhaps a 6–7 multiple. The buyers who are quick to tell you that they don’t pay the most (but, of course, they are still great buyers- for other reasons) are probably not likely to be very aggressive in pricing. Also, probably half or more of the people you talk with will duck the question entirely. (They don’t want to lose your interest by quoting a conservative pricing model, and yet they are afraid of quoting you an aggressive model, because it may “cost” them by getting your expectations too high.)

If you can’t get this last and most valuable bit of info – you still have gained good foundational info – and later when you are ready, a hired intermediary can probably learn more for you, by pre-screening before next stage conversations. (Buyers will tell an out- side intermediary more – especially when they realize that without such info, they may never even get to “look”.)

What about the caller who acknowledges that they’re a seller rep – and they want to represent you? Ask them the same questions about value. If they’re out and about in your industry, they should have information, and examples of companies they have sold. Ask them what makes them different or better than others at what they do. If you like what they tell you, ask that they send info on their firm, and references of deals they’ve done, for your files. Tell them you’re happy to keep their info on file, and you’ll call them if or when you have interest.

If the caller says they represent buyers, ask who they are representing, in this call to you. If they won’t tell you, they probably don’t have anyone yet in mind. (You do not want these people to go out casually “shopping” buyers for you. They will be careless about confidentiality and sloppy in what they tell about your company.) If they do have a specific buyer, ask why they think this buyer is a fit. Then, ask the same questions you would have asked of the buyer directly. If they can answer well, keep their info at hand, to call them back when you may have interest.

What about the buyer who does sound like a good fit, and who you think you’d like to talk with further? Before you tell them almost anything about your company, have them sign a written confidentiality agreement.

If you know of a good seller representative that you like and trust, bring them in immediately. They can give you important and valuable help in presenting info attractively, desirably, and correctly to the buyer from the start. It can greatly increase your chances for success. You will also have far fewer calls into your place of business, if you have someone offsite to handle next-stage contacts. Even if you start off by paying a flat hourly rate at $300 - $500 per hour for this - it can be worth millions to you in the end, with a more handsomely priced acquisition.

If you want to inch forward on your own, without help, at least get the non-disclosure in place first. Then proceed with care, and… warm them up!

Deborah L. Douglas is Managing Director of the Douglas Group, a private investment banking firm based in St. Louis, Missouri, which specializes in the sale of middle market companies. Ms. Douglas is a frequent TEC speaker, the author of “Cashing In” (a book about sale of the privately held company), and a frequent key-note speaker at trade and industry events around the US. For additional information, contact Ms. Douglas at 314.991.5150, or email at ddouglas@douglasgroup.net.