4 Tips to Differentiate yourself as a M&A Buyer

The M&A world has scores of purchasers in the middle market– private equity, strategic, independent sponsors, and search funds.  As M&A and the private equity industry has matured, there is tremendous focus on deal origination across the spectrum.

Back in the 1990’s, when the industry was in an earlier stage, it was not that hard to find proprietary deals.  Most sellers did not have dozens of buyers clamoring to buy, and were easier to engage on a relationship basis.   The advent of technology and deal exchanges has changed this.  Most buyers that use a sell side broker reach hundreds of potential buyers, due to the ease and low cost of these digital platforms.

This overhang of potential buyers can often create a high level of interest that can overwhelm the bandwidth of the seller, and create unmanageable competitive bid situations.  When this happens, buyers get little access to the sellers and usually only compete on price.  This can lead to an extremely high valuation to win a deal.  High valuations have little room for diligence error.  A high priced buyer will always reprice a deal if they find something major in diligence.  When this happens, sellers get disillusioned and may think twice about moving forward.

Auction deals, while comprising the lion’s share of all deals in the market, often create overly transactional conditions for disclosure, relationship building and price setting.  When this happens, both buyer and sellers absorb more process risk than they otherwise should have to hear.  A better deal making model is in a more relationship based approach.

With this approach, both parties spend time learning about each other before even getting to the bid phase.  When relationship building, sellers are more apt to tell you what is most important to them.  They are more apt to disclose the good, the bad and the ugly about the business.  Through first building relationship capital, both parties are smarter about each other and have better information, allowing them to bridge any asymmetrical issues early on.  Here are our 4 tips for buyers to improve their relationship engagement with sellers.

1. Understand seller motivations – Many sellers value intangible deal aspects as much as they do price. Ask the targeted seller why they want to sell and listen closely to what they say and also what they do not say.  Many successful owners feel indebted to their employees want to make sure they can trust the buyer to do the right thing with their employees.
2. Spend time to tell your distinct story – all buyers have a unique story and entrepreneurial path. You can never be sure what type of a buyer a seller is seeking.  Don’t assume you are not the right profile.  Your story may resonate with the seller who may come to see you more as a reasonable business person and someone they feel they can work with.
3. Be Honest about your experience– neophyte buyers, especially younger ones, often try to impress the seller with their big company credentials.  It is better to be humble about the successes you’ve had to date.  Position yourself as someone with big ideas and vision, but willing to learn from them the ropes of their business.
4. Focus on building financing credibility – a seller may love you but in the end, you have to raise the financing. Always bring an intelligent financing perspective into the early discussions.  This will signal to the seller that you are serious.  Capital credibility will intensify their interest in the deal and allow you to deepen your relationship with them.