We just conducted an acquisition search for a company looking to grow in a particular Wisconsin metro area. We identified 125 targets that met the buyer’s criteria and reached out to the business owners to assess their interest in selling.
In normal times, we get a 2% or 3% response rate to an outreach like this; sometimes no one responds. This time we got 12 business owners to raise their hand or approximately 10%.
Business owners tend to think about selling when things aren’t as much fun as they used to be. Running a business in the COVID era is anything but fun, and owners are being particularly responsive to acquisition inquiries right now.
Proactive acquisition searches
When growing through acquisition, buyers can take two approaches: reactive or proactive. In a reactive strategy, the buyer watches open market listings and waits for an appropriate opportunity to appear. This is a slower process, and impatient buyers may settle for something “close enough” rather than getting their ideal fit.
Buyers with a proactive strategy are working with advisors to build proprietary deal flow. They run a controlled search process that targets passive sellers, i.e., owners who would consider selling if the right opportunity came up, but who haven’t listed their business on the open market.
Current supply and demand
Companies in reactive buying mode may be surprised by the level of competition in the market. COVID has shaken business confidence which is why there are so few quality companies going to market right now.
We’re sort of seeing the same conditions as the residential housing market. Too few sellers are listing, which means houses are selling fast and above asking price. In the open M&A market, strong businesses (particularly those relatively unaffected by the pandemic) are seeing that supply issues are still tipped in the seller’s favor.
Running a proactive search
In an acquisition process, the critical first step is to set your strategy. This means drilling into your business model, strengths and weaknesses, culture, and revenue streams to define your ideal target. What sort of acquisition will create a “one plus one equals three” outcome for your business?
From there, your M&A search team generates a long list of potential targets. Typically this involves in-depth database searches as well as their own network sources. As a buyer, expect to review and approve this list before any outreach begins.
Next, your M&A team begins a disciplined outreach strategy to trigger seller interest. The goal is to bring multiple opportunities to the table at the same time so you have choices and leverage to get the best value for your company. You’ll begin by viewing executive summaries for each opportunity and then move into management presentations with a short list of sellers.
If the strategy is clear and response has been good, it might take 45 to 90 days to reach this point. Once you’ve identified your prime target, expect another two to four weeks at the Letter of Intent (LOI) stage.
The LOI is a written expression of both parties’ intent to enter into a transaction and includes a summary of the material terms of the deal. It’s an opportunity for the buyer and seller to determine they have basic agreement on deal terms and confirm there are no “deal breaker” issues that would tank the transaction.
Negotiating an acquisition can be costly and time consuming, so you want to put some time into defining key terms before you’ve put significant resources into the process. The LOI includes non-binding terms such as purchase price, structure, indemnification expectations, management arrangements, and other key closing conditions.
At this point in the process, however, you have not yet done comprehensive due diligence. That process can take another 60 to 90 days before reviews and negotiations are over and you’ve inked the final deal.
All told, a proactive acquisition strategy can often take five to eight months. You’ll need roughly three months to build a pipeline of opportunities that would benefit your business and three months for negotiations and due diligence.
The takeaway: If acquisition is part of your 2021 growth plan, start now. Build your team, identify your strategy, and run a proactive acquisition process. Buyers waiting for deals on the open market can expect limited choices and heavy competition.