Selling an individual or family-owned private company used to be like hitting a golf ball. Today it’s more like swinging at a 98-mph, split-finger fastball.
If investment bankers were beginning a sale assignment in 2010, they would ask the business owners to share information on past exchanges with potential buyers. The clients would turn over a few emails or letters and recount a couple of trade show conversations that amounted to, “Call us if you’re ever ready to talk.”
That is not how that conversation goes today.
Changed Buyer Behavior Results in a Changed Seller Mindset
The approach of many business owners before a sale has changed in response to sweeping changes in how buyers choose to address the prospective seller universe. These changes include:
Greater imperative to avoid auctions through direct owner contacts
Financial as well as strategic buyers learned that if they waited until a desirable property was ready for market and began on an equal footing with competing buyers, it was harder to differentiate themselves and easier to end up as a price taker.
Profusion of deal generation tools
An in-house business development function in private equity is a development of the past 30 years. Today, a sophisticated middle market firm sees an in-house business development person or team as just one tool among many. Outsourced business development firms, analytical services, and deal flow advanced by independent sponsors are all in the mix.
More ways to connect
In 2010, an owner or manager not ready to sell could simply instruct their team to ignore outreach from bankers, brokers, or potential buyers. These shutdowns were relatively effective—it often meant just not returning calls or discarding letters. It’s much more difficult today to remain disconnected from the broader M&A ecosystem.
More businesses in financial hands
It is one thing for a private equity firm to tell the owner of the Acme Safe Company, “Let us tell you how great our firm is.” It’s far more powerful to say, “We own Ajax Safe. We live in your world. Let’s talk.” Deal activity in more and more industries is dominated by strategic buyers who happen to be owned by financial firms.
More complex valuation metrics
Private company valuation has become both less and more complex. Buyers still perform discounted cash flow analysis, but – particularly for relatively straightforward B/B+ properties – can advance further based on a discussion of multiples of EBITDA and similar benchmarks. I’ve written before about the countervailing change in the assessment of more complicated and more desirable businesses. Buyers being asked to pay double-digit multiples are more likely to want to do a bottom-up analysis of production or sales trends. Consequently, for these companies, it’s much harder for an owner to have a clear sense of market value without engaging with prospective buyers and intermediaries.
Migration of non-public market intelligence sharing down market
In 2006, Graeme Frazier and I launched GF Data, focusing on collecting and selling data on private transactions up to $250 million. Under ACG’s ownership, that threshold has since increased to $500 million. At the time, our primary competition on larger deals wasn’t the major data providers but the free information offered by larger investment banks. Over the past decade, increased specialization among investment banks in specific verticals has extended this capability down-market in certain niches.
Greater awareness of investments involving an ongoing role
For business and personal lifestyle reasons, more sellers choose to transact when they have something left in the tank. Correspondingly, more investment vehicles are targeting minority or non-controlling equity investments, and deal professionals on both sides have gotten better at constructing continuing ownership and employment roles. Business owners understand the shift and – given the prospect of an ongoing relationship rather than a “clean getaway” – are more open to getting acquainted in the run-up to a sale.
Changed Seller Mindset Results in a Changed Sale Process
So, back to the 98-mph splitter versus golf ball on a tee. An investment banking team encountering a private business ownership group considering a sale is much less likely to have that one-time data dump on prior interactions today.
Depending on the business and the industry, the ball will likely be in motion in five ways.
(1) More prior contacts for the sell-side bankers to assimilate into their process.
(2) More sharing of high-level information prior to launch.
(3) More preemptive due diligence based on particularized buyer requirements (as opposed to generalized financial preparation).
(4) More targeted processes.
(5) More businesses choosing to forego out-bound marketing but willing to share their exit requirements with qualified inquiring parties.
All of this adds complexity to the trajectory and timing of a sale controlled by an individual or individuals rather than an institution. Rather than resisting these trends, Greenberg Variations Capital has built a business on rolling with them.
About the Author
Andy Greenberg is CEO of Greenberg Variations Capital, a mergers & acquisitions advisory firm based in suburban Philadelphia devoted to one-off or targeted transactions. Mr. Greenberg was founder and CEO of GF Data©, the M&A data tracking service, prior to its acquisition by the Association for Corporate Growth in 2022. For more information, visit www.greenbergvariations.com.
© 2024 Private Equity Professional | September 10, 2024
