As global merger and acquisition (M&A) activity hurtles toward a record year, middle market business owners and decision-makers are receiving an increased number of unsolicited offers to purchase their businesses. Whether the offer comes from a large strategic buyer or private equity fund, these conversations can be valuable whether or not the company is for sale.
This increase in M&A activity leads to a more competitive market across industries. Buyers are eager to identify and act quickly on attractive targets, thus driving higher valuations and favorable outcomes for business owners considering an exit. More than ever before, leaders of corporate development and business development at private equity funds are calling business owners directly with offers to acquire their companies.
Manufacturing companies have long been particularly attractive targets for consolidation and with a high number of these businesses still owned by families or entrepreneurs, buyers are more motivated than ever. Unsolicited offers and the conversations surrounding them can be nerve-wracking, but ultimately are another tool in a business owner’s set to better understand their company.
Many recipients of these phone calls, emails and letters will be owners and operators of manufacturing companies. While they may not have the steep growth curve of technology companies, an efficient, profitable manufacturing company generally offers predictable revenue cycles and stable earnings. Additionally, many lower middle market manufacturing businesses are still family or entrepreneur-operated, which often appeals to institutional investors.
Who’s Making the Offers?
Typically, the business owner or operator will know the person on the other end of the phone. The unsolicited offer may come from a longtime competitor or a larger company that is looking to acquire and/or expand a business line. However, as M&A activity heats up, there is an increasing likelihood that the unsolicited offer will be an unknown strategic buyer, private equity group or an intermediary (e.g. investment banker) calling on behalf of a company you may be familiar with.
Bear in mind that these outreaches are a good thing. While some business owners who are not ready to sell and are inundated with unsolicited offers may find the calls bothersome, at the very least it is an opportunity to have a conversation about your company’s value.
Guidelines for the First Call
- Ask the unknown caller(s) for information and credentials and do your homework.
- Reserve the right to call them back at a more convenient time or to pass their contact information along to a more appropriate contact such as the CFO or counsel.
- Do not offer confidential information or information not publicly available without an executed Non-Disclosure Agreement (NDA).
- Remember that there may be other parties interested in your succession plans such as competitors or business brokers seeking sell-side work. It is best to limit the information you share before contacting your team.
Navigating the Initial Process
Companies that have been through a merger or acquisition before may be well-versed in handling these conversations, but for an owner who either was not considering an exit prior to the unsolicited offer, or who is still unsure if they should consider it, the process can be daunting.
Leverage your team of trusted advisors from the first point of contact. Understanding the tax, regulatory, financial and legal implications of a transaction requires a number of specialists who can guide you through the nuances of each part of the deal. If you were not considering a sale before the unsolicited offer, it may also be helpful to meet with a wealth manager who will help you understand how a sale would affect your retirement goals.
During early conversations, if the potential buyer provides a valuation, it is important to get a second opinion. In 2015, valuations for manufacturing companies have continued to spike, reaching an average of a 6.8X multiple for enterprise value/EBITDA. For companies with enterprise values greater than $100 million that multiple jumps to 7.8X.1
An investment banker will look at your company and transactions with comparable companies to establish a range of fair market value. They will also suggest running a “sale process,” which involves creating a competitive market for your company aimed to drive up the valuation. The buyer’s goal is to acquire companies for the lowest price possible, so even a high first offer can very likely be improved upon.
Some owners may not want to sell, but may be interested in the market value of their company. If that is the case, be up front and request a range for the offer. The buyer benefits from the potential to make an offer that could pull the business into a sale and the owner gets an idea of what someone might pay for their business. If you have no interest in conversations surrounding the sale of your business, be mindful to not waste the other party’s time. There may come a time when you do want to sell, and a positive relationship with an interested seller will be beneficial.
Once an NDA is signed, the buyer has access to your company’s financials and they will likely begin exhaustive diligence. It is important to emotionally prepare to have an outsider come inside and evaluate the inner workings of your company. Having advisors answer questions and serve as intermediaries can reduce the discomfort that may accompany this part of the transaction. The process may take anywhere from two weeks to sixty days. Deals are not final until the closing papers are signed. From the day the phone rings with an unsolicited offer until the day (if it comes) that you sign on the dotted line, the company has not transferred ownership.
The current M&A market is providing a number of opportunities for deal makers and business owners pursuing acquisitions or sales of companies. As potential buyers of companies make more direct offers to attractive targets, business owners will face exciting decisions. Unsolicited offers and the conversations surrounding them can be nerve-wracking, but ultimately are another tool in a business owner’s set to better understand their company.
Partner-in-Charge, Sikich Investment Banking
1GF Data, August 2015
This material is a result of the efforts of Sikich Investment Banking (“Sikich”) and is for informational purposes only.
It is not intended as an offer or solicitation with respect to the sale or purchase of a security. It does not constitute legal, accounting, tax or other professional advice or services and is presented without any representation or warranty as to the accuracy or completeness of the information. Sikich shall not be liable for damages resulting from the use of or reliance upon the information presented herein.
Securities are offered through Sikich Corporate Finance LLC, a registered broker dealer with the Securities Exchange Commission and a member of FINRA/SIPC.