Navigating the Buyer Universe: Five Goals that Drive the Choice

Introduction

It continues to be a seller’s market. Buyer appetite and credit markets are strong. Private equity firms have record-high levels of capital to put to work. Strategic buyers shored up their balance sheets early in the pandemic, and now, as the economy recovers, that liquidity is being put to work for growth.

That doesn’t mean it’s easy to find a buyer. Sellers of great companies can be faced with so many options that choosing the best one becomes a formidable challenge.

This overview provides those potential sellers with quick insights they can use to narrow down their buyer options. Please contact our senior bankers for more detailed and customized guidance.

An Expanding Buyer Universe

Historically, three basic options were available to shareholders looking for outside capital or an exit strategy.

  • Financial investors: Funds focused on making direct investments in promising companies for three to seven years.
  • Strategic buyers: Large corporations that acquire other companies believing that the two combined businesses will drive more value than individually.
  • Public exit: Taking the company public through an IPO; an option typically open to only a small universe of sellers.

However, in recent years, the M&A environment has become increasingly competitive among buyers, leading to greater creativity in terms of the structure, ownership interest, and other deal attributes. There is now a proliferation of alternatives for owners and shareholders to choose from to achieve their objectives (Figure 1).

Figure 1: Evolution of the M&A Market Place:

As shown in the figure above, equity fund options may include private equity, industry specialists, or minority ownership funds, all of which make direct investments in companies and realize returns upon exit. Patient capital and family offices (where funds are derived from personal or family wealth and invested in a range of companies to diversify net worth) prefer a lower risk strategy and longer-term investment horizon. They typically invest large amounts of capital over a longer period of time, potentially reducing reinvestment risk within their portfolios. The landscape of strategic buyers has also diversified, including the rise of sponsor-backed private companies. Among public exit options, special purpose acquisition companies (SPACs), which raise capital through an IPO to acquire a company, have won their share of headlines lately.

How Do You Choose?

As sellers consider their options, there is no “one-size-fits-all.” Choosing the right buyer is largely dependent on what company founders and leaders want from the transaction.

Founder Goal: Stay Involved, Benefit from Growth

Equity funds, whether majority or minority investors, industry specialists or others, are ideal for shareholders with strong conviction in the company’s future performance and a desire to maintain some involvement in day-to-day operations for the foreseeable future. They encourage equity participation by the seller. That’s because the company will likely operate as an independent entity under its new owner rather than becoming a division of a strategic buyer/consolidator.

These funds typically seek companies that are leaders in industries with significant consolidation opportunity. The ability to increase size, scale, and capabilities via add-on acquisitions is typically attractive to private equity, as those are key drivers of value.

Since equity funds need to generate and deliver a return for their investors, most will seek a sale of the company three to seven years following their initial investment. As a result, one or more future sales of the business are likely, with each subsequent buyer adding scale and sophistication.

Founder Goal: Remain Engaged, Limit Subsequent Sales

Longer-term investors, such as patient capital, family offices, long-dated funds, and pension funds, often appeal to companies seeking a financial partner with a longer-term investment strategy. Historically, this investor class focused on businesses with generally steady performance (e.g., low to modest revenue growth, margin profiles, and cash flow generation) or those that might be prone to economic cyclicality. This group of buyers generally has more patience and risk tolerance given their lack of a defined investment horizon.

They also are less likely to sell a company in the near-term, which can be a benefit to sellers looking for greater certainty for the company post-transaction.

Founder Goal: Stay Involved, Retain Current Investor Partners

Secondary equity transactions, such as single-asset vehicles and fund-to-fund transfers, occur when the same equity fund looks to extend the investment horizon for a company. These strategies were originally designed for companies that underperformed or faced challenges near the end of their investment lifecycle that needed more time to address. 

Today, however, this has become an attractive strategy for companies that are top performers and enjoy a good cultural alignment and working relationship with their private equity ownership. Rather than sell the business to a third party, the existing sponsor will instead transfer the asset into another of its holding companies or investment vehicles, effectively resetting the clock on its investment horizon. This allows the same equity investors to continue working with the management team and contribute to the company’s ongoing success and eliminates the disruption from a traditional sale process.

Founder Goal: Walk Away, Maximize Liquidity

Strategic or corporate buyers are well-suited for sellers wanting limited involvement with the company going forward. A sale to a strategic buyer maximizes near-term shareholder liquidity and protects current shareholders against future operating and market risk.

Companies with significant intellectual property, technology, or other assets that could have incremental intrinsic value are particularly attractive to strategic buyers. Likewise, the potential to drive growth by selling new products to existing customers, or existing products to new customers — known as revenue synergies — tends to attract strategic buyer attention.

A newer breed of strategic buyer offers an appealing “hybrid” experience for sellers. Companies large enough to make acquisitions, yet themselves owned by private equity firms, can make attractive offers to sellers while allowing those shareholders to stay involved in the business going forward. This alternative can be interesting in that near term, it marries many of the benefits associated with selling to both a strategic buyer and an equity investor, but long term would still lead to another future sale when the private equity group exits its investment.

Founder Goal: Become A Public Company

IPOs and SPACs are suited for companies demonstrating public company readiness (e.g., strong financial reporting and controls, have seasoned leadership, corporate governance in place, etc.). Companies pursuing an IPO or SPAC acquisition need a proven track record of financial performance over time and strong prospects for future growth. Both SPACs and IPOs have pros and cons—read our take on the tradeoffs here.

Conclusion

Selling your business is one of the most significant decisions a business owner will make and has implications for the legacy of both the company and the shareholder(s). There are many options to weigh, nuances to consider, and pros and cons to balance.

For a deeper discussion of your strategic alternatives, please contact us.

Bill Watkins
Virgil Jules
Larissa Rozycki

Published September 2021
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