When selling all or part of a business, identifying qualified buyers is very important to an effective sales process. Before I go into my process I would like to share a story that involves my joining CFA in 2004 and being interviewed by a senior investment banker from our Dallas office.
When I was explaining to him my “deal experience” from the four prior years he responded, “Oh, you have been working as a business broker” I then asked him to explain to me how he distinguished between a business broker and an M&A advisor. He stated that if the “buy-side” was an individual as opposed to a professional buyer (i.e. a Private Equity Group or Corporate Acquisition Group) he would describe the transaction as business brokerage rather than M&A.
His point was that professional buyers are in the market everyday and need very little assistance in evaluating opportunities. The individual buyer, no matter how sophisticated they think they are, is not in the market on an ongoing basis and therefore, will be less proficient and therefore a more risky prospect.
With that introduction, since joining CFA I no longer deal with individual buyers. My concentration tends to focus on recapitalizations (recaps) where I represent a business owner that is looking to sell part of their business to gain some liquidity and continue growing their company aggressively with a financial partner over the next several years before ultimately selling. This financial partner is almost always a Private Equity Group.
There are several things I like about the Private Equity Groups. First and foremost they have money (although there are a few exceptions). Secondly, they are compensated primarily through equity stakes in transactions completed. Therefore they have a tendency to not waste their time or mine. While they may not always be able to specify what they are looking for, they are very competent at deciding quickly if they like an opportunity or not.
My approach to targeting prospective buyers starts with my knowing the Private Equity “players” that tend to concentrate on energy transactions. I like to keep my targeted group to a relatively low number (25) so that I can interact with them one-on-one to determine their interest — including who will be in the final five or so that gets to meet my client. I can tell a lot by the questions they ask (are they knowledgeable) and by the obstacles they raise (are they positive) in discussing my client.
The last and certainly most important of the criteria is the chemistry between my client and the prospective buyer. Certainly their price has to be competitive, but the chemistry, normally solves this issue.
In summary, my screening process includes: money, knowledge, interest, and chemistry.
While these guidelines will certainly apply to an individual buyer in a “brokerage” transaction; individual buyers are far more difficult to screen. Eliminating unqualified buyers is a key skill that an intermediary brings to his client. This skill ultimately saves the client valuable time. At the end of the day, when a business owner thinks about selling his business it is critical that they keep their eye on the ball (i.e. continuing to run their business profitably) and minimize any distractions.Â This time saving skill that an intermediary provides in only allowing qualified buyers to meet with business owners is “priceless”.