Finding The Right Investor

In their retirement planning, many business owners approach our firm very convinced to know who is buying their business.

‘I know exactly who will buy my company’ is a statement quite often heard, as Achim Neumann, President of A Neumann & Associates, a leading M&A Advisor and Business Brokerage firm, headquartered in NJ, explains. He continues, “as a matter of fact, these folks are so convinced that often it is difficult to even start engaging into the most basic preparation steps for selling a business.”

In preparing a business for sale, first an extensive interview is conducted with the business owner, mainly defining the competitive advantage and grow aspects of the business, among many other factors. A cash flow recasting is conducted and a valuation by a third party, accredited valuation firm is requested. Thereafter, a business owner will decide whether to move forward with a sale, and it’s at this point, that the marketing documents are prepared and the buyer/ investor target markets are defined.

Conducting the subsequent marketing to the target investors includes a passive and active marketing component. The passive one primarily consists of “posting” the business in a non-divulging fashion to various investor-used websites attracting interest from the buying community. The active marketing approach typically includes searching a company’s proprietary database of previous buyer inquiries, the acquisition of additional investor data, and then actively reaching out to such folks by letter, email and phone call.

In order to succeed, and more importantly, in order to provide selling leverage to the seller by multiple, simultaneous buy-side inquiries, this investor recruitment approach has to be wide spread. Only such approach will provide the seller with options. A singular focus on one particular buyer will never enable a seller with any type of leverage, and the seller will be solely dependent on this single buyer’s whimps.

However, by “casting a wide net”, multiple investors are attracted and the right investor needs to be chosen – identifying the true motivation and financial qualification of the individual or company. There is little sense to waste time with an investor, who either can’t financially execute a particular acquisition, or is not really motivated to proceed with an investment opportunity. Worse yet, taken a business “off the market” for such unmotivated buyer will not allow for qualified investor inquiries in the interim (typically precluded by an exclusivity provision in the LOI)

Reputable, established M&A firms have a sophisticated process in place for such selection process. For example, an investor who is refusing to provide a POF statement (proof of funds) automatically obtains a “lower rank” in being considered. Alternatively, an investor who feels compelled to heavily redact the Non-Disclosure Agreement (NDA) of the M&A Advisor is immediately viewed as less motivated.

Essentially, every investor pre-qualification should include three parts:

• Non-Disclosure Statement
• Management & General Background
• Financial Statement with POF

Investors, who after an initial contact with the M&A firm immediately start tampering with these essential requirements, set ‘red flags’, and are usually moved to the “end of the line”. These initial problems often forebode subsequent troubles in the deal making process, and as the old mantra in this trade says, ‘no motivation – no deal.’

Further, these negative signs are particularly troublesome for investors who refuse to provide both – the NDA and detailed financials; or for investors insisting on “their own NDA”. Reputable M&A advisors will always refuse dealing with these folks.

However, at times, business owners eager in pursuing a deal at all cost will invite such folks – only to find themselves in an extended, head scratching due diligence process with the buyer either walking out or making a ridiculous low-ball offer at the end  (and potentially compromising the seller’s confidential information in the process).

In sum, our experience over the past 15 years has shown, that not only multiple buyers need to be attracted, but also, that pre-qualification standards need to be established among investors to ensure a business owner can ultimately transfer the business to a motivate, qualified successor.

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This blog contains excerpts out of the recently published book

The Road Beyond – What Nobody Tells You About Selling a Midsized Business