The book uses a fictional business-owner Alex Stapleton to illustrate how to position and sell a business. Alex’s business has around $1 million in earnings, putting him in the “middle-market” or more specifically in the “lower-middle-market”.
The Hot List
In the book, Alex and his advisor sit down and develop a “hot” list of prospective buyers, a common step in the process. In fact, I just did that today with a client in
So how do we find buyers? We start with the traditional “hot” list, and then we dive in. We have a research group that uses SIC codes, NAICs codes, business intelligence databases, industry journals, trade show exhibitor lists, association membership lists. Sometimes we use creative methods such as finding out who has purchased the top industry keywords in Google adwords. The list is large, and these buyers are contacted multiple times using different media (mail, phone and email).
The goal, through all of this marketing of the company, is to create a competitive bidding environment, and the more prospective buyers you engage, the more likely the true market value of the business can be realized.
For example, we sold a company not unlike the fictional Stapleton Agency in the book – a company that could be positioned as a service business or a product business. In our case, the company did work with online marketing surveys. The buyer ended up being a large French conglomerate – a surprise to all of us and most certainly not on the business owner’s list of possible buyers.
Private Equity Groups
The book downplays private equity, and mentions that strategic buyers typically pay more. This is a true statement and I don’t disagree. But it isn’t that simple. Most PE groups have already purchased companies and they will often hunt for “add-ons” that are related to a portfolio holding. In other words, PE buyers are often also strategic buyers. For add-ons, PE firms will relax their standards, buy smaller companies, and even pay a premium.
There are two reasons I don’t like to ignore PE groups from the start, even if it is apparent they will be unlikely to win the deal:
1. My goal in marketing the company is to provide options to the business owner. In the last deal we did, the business owner preferred private equity, and that only became clear to him later in the process. He decided he liked the idea of only selling a portion, so the PE firm provided growth capital, management help, and allowed the business owner to buy back in using the same leverage formula they used – so he got a pretty good deal on his own stock and was able to take some money home.
2. I never want to forget the all-important competitive bidding process. If you decide later to go out to the PE firms then you’ve really lost time, momentum and possibly some buyers.
By the way, the PE firms like getting our “deal flow”. They want the opportunity to look and possible participate in winning an interesting deal. They would much, much (much) rather we showed it only to them, but most certainly they don’t want to be left out.
Finally, the private equity model of owning companies is a growing strategy, and some even say it increasingly competes with the public markets as a way for investors to own stock in companies. Someone keeps count of the investment in PE, and the latest I’ve heard is between $400 and $450 billion dollars of capital has been invested in PE firms that hasn’t been committed yet. This means there is a massive amount of money available and that there are a lot of people working to put that money to work. As a business owner, you may as well get in front of some of that money and see what your options are.
I am not trying to denigrate the book, which again does a very good job of describing the selling process. In fact, later this week I’m speaking to a group of financial advisors and I’m going to suggest they recommend this book to their business-owner clients. I’m just pointing out how the character in the book, Alex Stapleton, may have had a different experience working with us vs. the intermediary he chose.