Expand acquisition targets with passive sellers
By Scott Bushkie

If you follow the M&A news right now you know it’s a seller’s market.  There are more buyers with cash looking for quality acquisition opportunities than business owners looking to sell.

And if you follow economic news at all, you know growth in the U.S. economy is slow and slated to stay slow.  So what’s a company that’s looking for growth supposed to do?  Many organizations are pursuing acquisition..

According to survey results from Merrill DataSite, middle market executives were focused on expansion in 2012.  Roughly a third (37 percent) were looking toward internal growth, one in 10 were focused solely on acquisition, and most (40 percent) were pursuing a combination of both.

What we’re finding right now is that there’s a strong untapped market of could-be sellers who haven’t taken a proactive approach to put their company on the market but will respond to serious inquiries.

For buyers, this is an opportunity to circumvent all the heavy competition for opportunities currently listed in the market and take advantage of one-one-one negotiations.

For example, we have a client in Michigan that’s hired us to do a buy-side engagement.  A typical buyer’s side process should means working with the client to create an overall acquisition strategy, researching  to find target companies that fit the criteria, contacting each business owner to determine their interest, gathering information for a valuation, negotiating an agreement, facilitating due diligence while working with the rest of the deal team to get the deal closed.  Fees for this type of engagement are paid by the buyer company with the majority of payments only due upon a successful acquisition, there are normally no fees paid by the seller.

Our client, is a second generation company has been around 40 years, has about $35 million in sales, a strong balance sheet and has been growing organically each year.  But growth is getting tougher and margins seem to be shrinking in their industry.  They have decided to implement an acquisition strategy to boost their top and bottom line.  In three months we’ve been able to uncover five different companies that fit within their growth strategy.

Company One does exactly what our client does in an adjacent marketplace.  The buyer would gain significant market share in their region along with economies of scale.

Company Two sells a different product to the same type of customers and is also located in an adjacent market.  This business boasts 50 percent gross margins and has a significant opportunity to grow worldwide, especially in emerging markets, while the U.S. economy remains slow. It also has additional warehouse space that could make a nice second location for the buyer’s original distribution business.

Companies Three and Four are both distressed options.  While there’s the opportunity to get an extremely good deal, but we have to understand how much of an ongoing business is still there.

Customer Five is much larger than our client, here we need to understand if it makes sense to buy a piece of the business or if there’s a way acquire the entire operation while mitigating the risk.

We suspect there are a lot of baby boomer-owned businesses like these out there poised for sale if presented with the right opportunity.  The advantage in targeting these passive sellers is that you can get into direct negotiations.  While that’s not something we would recommend for our sell-side clients, as a buyer it’s to your benefit to be the sole negotiator at the table.

If you do a traditional M&A search right now, and just look for what’s on the market, you’re going to pay a premium because of the amount of competition.  However, if you can get in the door when the timing is right, before a business owner engages an M&A Advisor, you may be able to seize the opportunity and pay a fair price without having to compete with others in a situation that might drive up the price.

For businesses looking to grow, acquisition is still possible and affordable in this market.  With the U.S. growth rate on such a slow pace, it may make a lot more sense to buy a business than try to grow organically.

My advice is to engage the right advisors develop your strategy and be prepared to move quickly and efficiently when you find a company that meets your criteria. There will be some expense in pursuing this strategy but if well thought out and executed you will be the only buyer at the table which most often equates to purchasing for a lesser price than if you are in a competitive environment with other companies and Private Equity Groups.

Scott  Bushkie is  Principal of Cornerstone Business Services, a low-to-middle-market M&A firm serving the Midwest.  Reach him at 888-829-9061 or [email protected]

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A thought-leader in the industry, Scott developed the Cornerstone Process to offer investment banking M&A-level services to the lower middle market. The result is a closing ratio that’s more than double the national average.