Business Owners Beware of the "We Have Qualified Buyers" Pitch
By: Dave Kauppi
We were just concluding our first information gathering meeting with a new client who had engaged us to sell her business when she handed us a letter. That letter was from another Merger and Acquisition Advisory or Business Broker firm.
The letter began: "Our buyer group has requested that our firm assist them
in locating a company within your industry that would be willing to sell
their business. The limited information we have regarding your firm indicates
that your business may meet the buyer's requirements. We would like to speak
with you further about the opportunity to sell your business."
Our new client asked us what we thought about this letter given that her
company was very unique and she did not believe that this company really
understood what her business did. As I read the letter, my suspicions
were confirmed. This unfortunate practice of soliciting business owners through
mass mailing representing supposed buyers gives our profession a real black
eye. I don't know where this practice started, but many in the business broker
profession have unfortunately been taught that this is a valid way to prospect
for sell side engagements.
Here is how it works. If the business owner responds to the solicitation, the business broker schedules an appointment to meet with the business owner. When the broker shows up, one or two things happen. If he says he is representing an industry buyer, somehow the potential selling company just is not a fit. It is either too small, not growing fast enough, in a slightly different niche, doesn't have big enough gross profit margin, etc., etc.
Another approach is to say that he is representing a Private Equity Buyer.
Let me tell you, everyone in our profession could claim that. Our firm gets
5 solicitations per week from Private Equity Buyers. The typical email reads: .......should
you have any clients or prospects who fit this criteria and our investment
parameters below, we certainly would be interested in discussing them with
- New investments: $20+ million in revenue, $3+ million in EBITDA
- Add-on acquisitions: $3+ million in revenue
- Investment size: $8 - $50 million
- Geography: U.S. and Canada
- Industry generalist
With that broad criteria and the industry agnostic approach, thousands of
businesses could qualify. There are a couple of problems here. First, Private
Equity Firms almost never engage an M&A firm on a retainer and success fee basis. In other words, if the M&A firm will go out and find prospects on their own dime and bring those prospects to the PEG, and a deal is closed, then the PEG will pay the M&A firm a success fee. It is entirely a contingency based model. So for an M&A
firm or business broker to call one of these PEGs a buyer client is a bit
of a stretch. Also, PEG's are strictly financial buyers, so if you want more
for your company than 5 X EBITDA you are not going to get it from these buyers.
Let's get back to our client's letter. As I read further, it continued, "The
Acme Business Group has over 80 years of combined experience in business
brokerage and is an affiliate of America's largest network of business brokers.
As a result, we can give your business confidential exposure to these qualified
buyers locally and nationwide. We can help prepare your business for sale
with the proper documentation and an effective presentation that will position
your company most advantageously to receive the highest offer from one of
our potential buyers. We are here to assist through the entire selling process
from preparation to negotiation to closing documentation."
Gee, it sounds like their original "qualified buyer" has fallen through before
the end of the letter and they now want to represent you to all of the other
buyers out there that are right at their fingertips or at the fingertips
of their large, nationwide affiliate network. Get real!
As a business owner, you probably get one or two of these letters per month. Hopefully you will see through them and put them in their proper place, the waste basket. Unfortunately for the Merger and Acquisition advisors that really do have a retainer fee based legitimate buy side engagement, we have an extra hurdle to clear in order to do our job. The approach that our firm uses to overcome a very skeptical business owner community is to provide a very specific description of the target company in our buy side engagement agreement.
For example, our agreement might read, " The purpose of this agreement is to set forth the terms and conditions under which MidMarket Capital, Inc. ("MMC") agrees to advise Acme Machine Tool and/or its owners, shareholders and affiliates (collectively, "Clients")
as consultant, and the sole and exclusive finder, in an effort to locate
acquisition targets, described as machine tool manufacturers for the medical
device industry with revenues between $20 million and $100 million, and effect
the purchase or merger of the identified acquisition target's business."
If we get interest, but a healthy dose of skepticism from the target company owner we are contacting, we often send him our buy side engagement agreement with the identity and specific contractual terms blacked out. We leave enough of the signature visible so that they can see that it is a real contract, but cannot determine the identity of the client. This generally works to at least begin a dialogue and move to the next step.
Selling a business is not easy and your choice of the firm that you use to
represent you can be the difference between a successful outcome and a big
waste of time surrounded by a lot of frustration. My hope is that a lot of
business owners read this article and reject this unfortunate business process. As I tell our associates, "What a client sees before the sale is what they can expect after the sale." The sale here is selling the business owner on engaging the Merger and Acquisition Advisory firm. Do
you really think a firm that approaches clients with this lack of integrity
deserves to get your business?
About the Author
Dave Kauppi is a Merger Acquisition Advisor with MidMarket Capital, serving mid-market business sellers. We maximize your business selling price with our buyer database, Strategic Buyer Search, and our Soft Auction Process. Visit us at http://www.midmarkcap.com/ Subscribe to our free Exit Strategist newsletter http://www.midmarkcap.com/exit (630)325-0123 firstname.lastname@example.org
(ArticlesBase SC #1783805)
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