We often see smaller businesses receiving weekly outreach from interested buyers. This Buyer interest tends to come from financial, rather than strategic, buyers and is driven by “getting a bargain from an unsophisticated seller” – and interest quickly fades when the likelihood of a bargain disappears. In Myth #1, we introduced information asymmetry, and it’s most visible in these “interested Buyer” calls.
There is a whole segment of Buyers whose investment thesis doesn’t amount to much more than acquiring companies at below-market valuations and exiting the rolled-up business with an “at-market” valuation within a few years. Their pitch is that the transaction will be “easy,” and the Seller will get a “2nd bite” at an exit by taking equity in their venture. However, by drastically undervaluing the business in the first place, a Seller would need a 2 – 3X increase on the new equity simply to get back to their own market valuation (but that is for another Myth). Many Buyer’s investment thesis relies on their ability to acquire undervalued companies – namely yours.
On many acquisitions that Bravery is engaged to lead, the founders / owners have been fielding calls from persistent prospective buyers (or brokers). Once they direct them to us (their Sell-Side advisors), a lot of interest melts away because they are no longer the only one who knows the market value of the business, and the “bargain” deal they thought they could obtain is no longer viable. To be fair, many interested Buyers do transparently engage in a dialogue with Bravery, but the valuations and structure are usually quite Buyer-friendly.
That said, many excellent Buyers (and their representatives) do reach out to prospective targets, but their targets are usually large enough to have come to their attention in some manner and for smaller firms, approaches from strategic Buyers are the exception rather than the norm. This Myth stems from the idea that inbound volume indicates viable interest levels when in fact, it is only an indication of how easy it is to sell below market – without ever articulating the inherent value of the asset.
The key here is to know what your market valuation range and deal structures are and then filter accordingly. In order to obtain a market valuation, it’s important to select advisors with a depth of understanding of the company, the industry, current market dynamics and valuations. Selecting an advisory that works across industries without a depth of industry knowledge will net a generic multiple, potentially leaving behind a significant component of the total valuation.
Our philosophy is that a desirable acquirer must bring value to the equation that will allow the combination to be more than the sum of the parts. Buyers that simply want to bring “executive leadership” and charge a hefty management fee to the Seller won’t provide the necessary post-acquisition synergies that generate future value for the Seller.