Mergers and Acquisitions For Dummies (18 page)
Read Mergers and Acquisitions For Dummies Online
Authors: Bill Snow
Although I call selling “easy” earlier in the chapter, keep in mind that that's a relative term. Selling is typically easier than trying to make acquisitions, but selling a company is fraught with challenges, difficulties, ups and downs, and sheer white-knuckle poker playing. For more on actually navigating a sale, check out Chapter 11.
What's a quality company of critical mass?
Although definitions vary from Buyer to Buyer,
critical mass
simply means a company that has size, scale, and scope. In other words, it isn't a start-up or an unprofitable company selling a product indistinguishable from the competition.
In a very general sense, critical mass may mean any of the following:
Revenues north of $10 million (and the farther north, the better):
Larger companies usually have more critical mass than smaller companies because they're often able to withstand an economic decline. They have more company to go around! Nothing is particularly magical about $10 million other than the fact that it's larger than, say, $1 million. But after companies pass this threshold, they're often considered lower middle market companies, which simply means they're not a small company anymore. An unprofitable company with enough revenue may even have value to the right Buyer. Think of it this way: Say two companies each have an annual loss of $2 million. Everything else being equal, would you rather take Company A with $5 million in revenue, or Company B, with $100 million in revenue?
EBITDA north of $2 million:
Similar to revenues, the higher the EBITDA (earnings before interest, tax, depreciation, and amortization), the more critical mass for the company. Companies with large-enough profits will always be in vogue with Buyers. A company with only $500,000 in EBITDA may be more susceptible to an economic downturn than a company with $5 million in EBITDA.
Access to C-level decision-makers at clients:
C-level executives
are the top-ranking (CEO, CFO, and the like) executives at companies. Selling products or services into the executive ranks is often a coveted level of access, and companies that lack that sophistication may be willing to pay a premium for it. Wouldn't you rather have the CEO, CFO, or some other high-ranking official than some low-level flunky as your decision-maker?
A strong name, good reputation, and/or brand awareness:
Many Buyers are interested in obtaining these intangibles. In fact, a solid brand and reputation can help an otherwise troubled company generate a good price during a sale.
Buying is difficult even if you know what you're doing
Believe it or not, buying a company is more difficult than selling one. Owners of companies are bombarded on an almost daily basis from all sorts of Buyers. I'm constantly amazed by the fact that these would-be Buyers, be they private equity firms or investment bankers working for a strategic Buyer, are often oblivious to the fact that a Buyer is little more than a commodity to the owner of company with $10 million or more in revenue. Buyers are a dime a dozen.
An added difficulty in buying a company is that Sellers fall into two basic camps: those who know they want to sell and those who don't want to sell. Deals offered by those who know they want to sell are difficult deals for Buyers because a wise Seller has gone through the M&A process I cover in this chapter and has hopefully generated interest from multiple parties, thus putting her in the enviable position of having options.
Those who have no interest in selling are difficult deals because they aren't looking to do a deal! They aren't selling their business. Period. And if the company has critical mass â that is to say, sizeable revenues or profits or a strong brand name â the owner is tired of receiving a constant barrage of phone calls, e-mails, and letters from Buyers of all shapes and sizes who all say the same thing: “We have money, we're different, and we want to buy your company.”
Even worse, many of these so-called Buyers aren't seriously looking to buy and instead are on fishing expeditions and have entrusted the cold-calling to the lowest-level executive they can find. Many times, the person making the phone call is fresh out of business school, which means he probably hasn't yet learned any real-life business lessons.
Buyers, take note: Never say “We have money, we're different, and we want to buy your company.” Everyone says that! For tips on how to better entice an otherwise uninterested business owner, see Chapter 6.
Another obstacle for Buyers looking for acquisitions is that targets are quite often the Buyers' competitors. Understandably, the owners and executives of these companies are extremely reluctant to talk to a competitor, let alone give up sensitive information such as revenues, profits, customer data, sales compensation, and the like.
Following the Power Shifts in the M&A Process
During a typical M&A process, the power shifts from Buyer to Seller and back again many times depending on which party has more riding on a particular stage of the deal. This swing in motivation, plus a little poker-esque bluffing and tell-reading, means the power balance in a deal is constantly shifting.
Being cognizant of the power issue is extremely important as the savvy deal-maker navigates the sea of deals because, as negotiations progress, who's in power one day may not be who's in power the next.
Looking at the factors of motivation
The most motivated party in a deal is the one most likely to cede power to the other side to make sure the deal goes through. But what exactly provides this motivation? Several factors:
Interest:
The side that has the most interest in doing a deal probably has the least power because that party will be most willing to compromise in order to get a deal done.
Although you don't want to appear overly interested to do a deal, you don't want to inadvertently appear blasé, either. Failure to show interest, respond to requests, and answer questions may cause the other side to call a halt to the process because it's concluded you're not interested.