As private equity buyers, we know what we want, and plenty of ink has been spilled explaining how to go about searching for and identifying the right business to acquire (including on this site: Private Equity Search Step by Step). But what about the other side of the equation? Attractive firms can field dozens of acquisition inquiries and choose from multiple competing offers when they decide to sell. What do those firms look for in a buyer, and why do they choose one offer over others? If you want to successfully acquire businesses, you should know the answers to these questions.
When I started writing this post, I was surprised at how little hard data exists on this topic. What percentage of the time does a deal simply go to the highest bidder? Exactly how often does a quick and certain close or a personal friendship tip the scale? Shockingly, there just isn’t much out there.
For that reason, we plan to conduct our own informal survey of the ASM readership and update you on the findings in a future post. In the meantime, this article will cover some of the principal reasons sellers tend to choose buyers and hopefully give you a better awareness of the bases you should cover when trying to buy a business.
The Key Factors from a Seller’s Point of View
Price: This is obviously the first factor that comes to mind when you think of a successful purchase of a business (or just about anything else). But you would be surprised by how often the winning offer in a private equity deal is not the highest offer. Why? Because sellers are not robots, but human beings with a wide range of motivations, both financial and non-financial. And even from a strictly financial point of view, there are other drivers besides headline sales price. This is very good news, because it means that even if you do not have the deepest pockets among a company’s suitors, you still have a chance to win if you can deliver on other factors that matter to the seller. Some sellers, for instance, may be swayed by the amount of upfront cash in a deal (versus deals that pay out over several years with seller financing) or post-closing purchase price adjustment mechanisms such as an earnout, which can modify the sales price (typically over a period of 1-3 years) based on future performance.
Speed and Certainty of Close: For sellers anxious to either retire or simply move on to a new stage of their career, a quick and certain close may outweigh their desire to squeeze the last dollar out of a deal. If you are confident in your due diligence and have dependable funding sources—such as cash upfront—speed of close is a bargaining chip that can work to your advantage in getting more value in an acquisition. But don’t assume your word will be enough – expect the seller to do some financial diligence on you to make sure you can make the deal happen and are not simply—as I once heard it described—a “tire kicker.” On the other hand, any issues that work against a rapid, guaranteed closing—such as regulatory or antitrust concerns or a long financing contingency—may make a seller wary of doing business with you absent a premium on the sale price.
Post-Sale Continuity and Control: For many sellers, particularly of small-to-mid-sized firms, their emotional investment in a business is as great as their financial investment. They may even have a vision for the company that extends beyond their stewardship of it, and may be willing to sacrifice some amount of price in favor of non-financial factors, such as the continuation of a management team or location they have assembled or brand image they have built. Buyers willing to accommodate that vision could find themselves winning out over competitors who offer a higher price but plan to fire existing employees, shutter a facility for offshoring or overhaul a brand.
Likeability and the Personal Relationship: In some cases, this factor trumps all others—even price—from a seller’s point of view. Most people simply prefer to deal with folks they like, trust, and can have a positive ongoing relationship with, especially if they view their business as a legacy that will still reflect on them post-sale. Suitors who go out of their way to find common ground, make a friend of the seller and ease procedural burdens for them (for instance, by helping with onerous paperwork) are more likely to be rewarded, even if their offer is not the highest.
Etcetera: A myriad of other factors can figure into an individual seller’s calculus when selecting a buyer. The buyer’s experience level and track record, for instance, might tip the scale, or whether they speak the language of the industry fluently. Some sellers may want a board seat or a post-sale consulting role. Others may equally wish to avoid such ongoing ties. Some may prefer to sell to an independent sponsor, others to a strategic buyer (typically an existing competitor or adjacent business) with an established industry reputation. Non-compete agreements that restrict a seller’s future activities—very common in private equity deals—might turn off some sellers to the point that they will accept a discounted price to avoid them. Ultimately, there are as many potential motivations as there are individual sellers.
Conclusion: Listen, Intuit, and Ask
You may have noticed that some of the factors above are specific and “hard,” such as sales price or speed of close. Others, such as likeability, are more general and “soft,” and play into the seller’s values and what type of person they prefer to deal with or have carry on their legacy. In both cases, putting together the winning offer for a business requires understanding the seller’s motivations. In a way, it is like being a psychologist. But in another way, it is like being a romantic suitor. You need to speak the seller’s “love language.” If personal relationships are what matter to them, learn about their life. Send handwritten notes or thoughtful gifts to make it clear you would like to make a friend as well as an acquisition. If the continuation of the business is what matters to a seller, spend quality facetime getting to know them and their employees while emphasizing your desire to preserve and augment what has already been built.
If figuring all of this out seems daunting, it shouldn’t be. You just have to listen to what the seller tells you, learn a little about their background, mindset, and personality. And it should go without saying that this will work best if you approach it earnestly rather than in a Machiavellian way. But if you’re faced with a seller you can’t quite get the measure of, there’s always a dependable method for finding out what it is that moves them. Just ask!