Commitment of buyers and how to approach an acquisition?

What do we see in practice and what is this article about?

In practice we see a lot of buyers and they all have a different approach. When buyers reach out to us their objective is the same: they want to buy a company. However, what we don’t know anything yet about their level of preparation and commitment. Here buyers differ a lot. Differences exist in their commitment, the preparation they have done, the funding they have available and the strategic rationale of their acquisition plans.

Often buyers reach out to us with the request for one of the companies we have listed on our website. For more details on these listings please check: companies for sale. In theory, there is nothing wrong with this. Companies planning to do acquisitions have to start somewhere. In some cases, it is just an individual screening the internet with a hidden desire to buy a company one day. Sometimes there is much more behind a buy-side request. We don’t know this directly from the start. However, we help many buyers with acquisitions. For each of these buyers we see how they approach an acquisition. Further, the CFIE team has been working hand in hand with many different type of buyers (from corporates that do just one single acquisition to ‘buy and build’ acquirers that buy a whole string of companies). Hence, we have a clear opinion on how a good buy-side project should be run. This experience is what we use to help you during your acquisition project.

This is the content of this article:

• What is crucial when doing an acquisition? You have to have it right!
• Buyer example 1 current project
• Buyer example 2 current project
• Buyer example 3 current project
• How committed are you, do you really want to buy a company?
• The costs of buying a business
• What are possible consequences of doing an acquisition yourself?
• Conclusions about how to approach an acquisition

What is crucial when doing an acquisition? You have to have it right!

The crucial aspect of an acquisition is simple. You have to have it right! The acquisition must be a success. If the acquisition is not a success everybody involved loses. I have most pride in companies that have been acquired and are much more successful 5 years after the sale. As an advisor, we keep following the transaction after the close. We see how the company has developed many years after the acquisition. On the one hand, we keep track of how earn-out constructions play-out. Hence, we see the numbers of the company again in the future and how the actual figures compare against the forecasted ones in the past. On the other hand, we are also interested in how the people involved in the transaction do years after the sale. In a nutshell, we as advisors, are proud if the new set-up develops well.

A successful acquisition is even more important for the seller. Often it is the lifework of this entrepreneur. He or she has received a nice cheque (or bank transfer in practice) for the sale of the company and receives further compensation if the company develops well (via the earn-out construction). However, given it is also the lifework of an owner there is much more than just financial motives. The owner cares about the employees, the brand name that has been build and the respect received of the people involved. Therefore, an owner also has a clear, and very high, interest in making this work. For a buyer it is obvious that an acquisition must be right. They get the future financial benefit (profits) of the company. They make the investments and do the post-acquisition integration. To conclude for everybody involved: the transaction must be successful. You must have it right!

Buyer example 1 current project

Now I want to switch to three different scenarios of current buy-side projects we are running. This should give you a broad idea of how buy-side projects can be run. Project 1 is an acquisition with a lot of desk research. It is a project for an automotive supplier in the plastic injection moulding industry. CFIE knows many of such suppliers that are for sale via an active mandate, have tried a sale in the past or are just open to speak to strategic buyers that could add value to their company. The buyer approached us based on various automotive injection moulding profiles for sale on the CFIE website.

This is a very committed buyer and we agreed on a retained mandate structure where we work for the buyer in this project. We showed the client 22 profiles of companies in their area (plastic injection moulding for the automotive industry). These were all companies that are for sale or open to discuss a business sale. Of all companies further details were provided and the interested buyer studied the profiles in detail. Step for step companies were eliminated from the list and other ones were highlighted. This gave the buyer practical experience to test their acquisition strategy and buy-side requirements on each target. A further advantage of seeing so many targets is that it helped the buyer to determine and assess planned synergies per case. Finally, two companies were selected that will be visited which is something we plan to do soon.

Buyer example 2 current project

This buyer, active in the manufacturing of mechanical products, approached us for support in an acquisition. CFIE has a technical person in the team that knows this industry very well. Hence, we had a large number of calls with the buyer to discuss their strategy and approach different routes to go. They are a market leader in a specific industry and want to look for another, related business segment, to do an acquisition. The targets we identified were handpicked by our technical expert. Quite many were in a different direction as our client had in mind and were new and refreshing to them. We made four lists with targets in similar, very much related industries. This gave us more than 100 companies that were evaluated. All these targets were given scores of 1-10 by our technical expert. Based on these target lists the buyer came up with feedback which led us to a real (short) list of suited handpicked candidates.

All these targets were approached by us. Firstly, we spoke to the company owners we knew already ourselves. Then we reached out to business owners via our network. After this we just approached the target owners directly via phone or social media (like Linkedin). This led to a string of interested companies that wanted to talk to us. First the companies were visited by us, the advisor. After that they were visited again, but this time together with the buyer. Some companies were deemed less suited after the personal visit, some were considered high quality targets. With these top quality targets we are continuing the discussions currently. Our client, the buyer, is in the driver seat and best position as there are a large number of targets they can chose from.

Buyer example 3 current project

This buyer, active in the hosting industry, is helped by us via a buy and build strategy. This means they want to do a large number of acquisitions and grow a group of similar hosting companies across Western Europe. CFIE works with its M&A IT team of people that have experience in the hosting industry to find suited targets. In some countries we already know the suited targets, in other ones we approach them with a detailed story on the strategy of the buyer. There is many targets these buyers can talk to and pick the most suited ones. By speaking to these targets our client knows quickly if they are suited or not. Once again, like in the two other projects, there is a good strategy and a committed buyer. This buyer pays for a detailed and deep search of targets and support in the acquisition process.

How committed are you as a buyer, do you really want to buy a company?

Above you have seen just a few examples of buyers but personally I have been involved in acquisition projects of many more buyers. This experience helps one to optimize acquisition strategies. You clearly see the difference between each type of buyer and how they approach an acquisition project. More importantly one sees the difference in commitment. Buying a company is just very time consuming and expensive. Further, you have to have it right. An acquisition that is not successful is the worst that can happen to everybody involved. Hence, we only work with very committed buyers that agree to a retained mandate structure. In these projects we work for the buyer only. For us, a retainer, a fixed monthly amount shows the seriousness of the buyer.

The costs of buying a business

The costs of buying a business are very high in practice. Most buyers try to keep costs for advisors as low as possible and haggle a lot. Many buyers want to pay a fee only in case of a successful sale. I don’t want to judge this position, I just want to explain what we see in our everyday life as M&A advisors. However, buying a company is not like buying a house. Buying a business depends on people and you have to have it right. Buying a business has many more aspects that need to be considered (legal, tax, cross border contacts). Most importantly, you have to speak to the right companies directly from the start. The costs of a business acquisition are of course important. From our side, we are quite flexible in working out a good proposal that works for the buyer and us. Compared to the larger investment banks we clearly have more friendly rates. For more details please read this article about the costs of buying a company

What are possible consequences of doing an acquisition yourself?

Business buyers might decide to take a very pragmatic route and do an acquisitions themselves, especially if an interested seller comes along. The main consequence is often that buyers talk to one seller at the time. In many industries we are able to point out suited serious sellers. We know a lot of sellers and have had contact with many sellers in our core industries. Speaking to one seller only has certain risks. Here I describe some of the practical risks:

• You limit your options
• The target might not be in line with your company strategy
• You might lose time in case it doesn’t work out directly
• Your negotiation power is less given you only have one alternative (compared to speaking to more acquisition targets)
• There might be many more and better suited targets out there of whom you are not aware
• The chances of success are lower and the price you pay might be higher
• Resources: the acquisition process takes a lot of additional time. You will most likely only use your key people. This might wear them out and the chances your best people get stressed are high
• Valuations: do you know the current market valuations. Put differently, are you sure you are not overpaying for the company you acquire? Or offer a too low amount that scares away your only target
• Time: if you have limited time you can be dragged into a time-consuming process needing to start over when time is not in your favour anymore
• If it is a cost motive, please also take the costs of your own time into account
• You might lose focus on your own company and its situation could deteriorate

Conclusions about how to approach an acquisition

Based on our practical experience we know that doing an acquisition oneself might work. Doing just an acquisition is not too difficult if you have sufficient financial resources. Doing a successful acquisition with the right target though is what matters. Finding the right company is not easy at all. In the end this is what is really needed. The best bet is to appoint an advisor that understands your strategy and industry. Based on this knowledge the advisor goes with detailed search requirements broadly into the market. This will give you an idea of which targets are out there that are not actively for sale. It will give you the highest chance of a successful acquisition.

What is your opinion on how buyers should approach a possible business acquisition?
Please give your opinion here.

Clinton | Friday 9 December 2016 | website: resources.theexitfirm.co.uk/
Excellent article, Govert (or whoever wrote this). Thanks for sharing the real life cases of buyer mandates and how you executed each one.

I completely agree with you that buyers who do not wish to pay for quality advice are generally buyers who lack commitment. They are so caught up in their own view of the world that they do not realise the full implication of a payment based only on a completed acquisition. In particular, they do not recognise that the big risk factor is their own indecision, inability to close on deal, lack of access to finance (or other impediment) etc that causes the deal to fail. Anybody who believes the advisor is not deserving of compensation for the time spent, even in situations where the deal was lost through no fault of the advisor’s, is an unreasonable buyer.

That said, having been a buyer before, I know it is difficult to commit large sums with no clear way of measuring value for money or RoI when it comes to advisor fees.

The solution, of course, is that buyers need to research and vet their advisor thoroughly before engaging their services and to agree a payment schedule only once they’re satisfied in the competence and integrity of the advisor.

Christian Koschmieder | Monday 12 December 2016 | website: www.geteconsult.com
We strongly recommend to follow a structured and proven process.

Piet Aarts | Friday 23 December 2016 | website: ecsova.weebly.com
A really great article Govert. I hundred percent agree with your statement that planning and market knowledge is of key importance for success. I know from negotiating many complex deals that planning is at least 80 % of the work.