“Selling Your Company? Get to Know the Players”

When selling your company, it’s easy to get caught up in typecasting, such as thinking a strategic buyer will pay more than a financial buyer — or offer a better outcome for employees.

Yet rigid thinking can get you into trouble. Instead, focus on the quality of potential buyers and their propositions.

There are generally two types of buyers:

• Industry buyers, also known as “strategic” buyers, typically operate in allied industries and acquire because of operational benefits or strategic advantages of two companies working as one.
• Private-equity buyers, also called “financial” buyers, usually acquire minority or majority stakes of companies using cash and borrowed funds. Relationships can range from arms-length to full overhaul. Many seek niche companies with strong managers who want to remain with the company after the closing.

“When we sold our prior business, we talked to both industry and equity buyers,” says Rob Nolan, now president of Customer Direct, a Chesterfield, Mo.-based $2 million call center and fulfillment business. “Interestingly, our most ‘strategic’ buyer was someone without a company — an equity-backed CEO who was building a business via acquisitions. As we were one of his first deals, he couldn’t have been more motivated.”

Both industry and private-equity buyers strive to create competitive advantage and increase shareholder wealth, but differ in how they obtain goals in five key ways.

1. Acquisition goals

Because they must resell in a few years to realize the gain on their investments, private-equity buyers have clear exit plans. They are often characterized as low-ball buyers or “flippers” of companies, without due credit for the value they add between acquisitions and dispositions. In contrast, industry buyers seek to build on their existing companies and intend to hold on to acquisitions.

“We win deals by providing a good home for the owner’s company,” says George “Gus” Hoster, president of Evans Adhesive Corp., a $15 million manufacturer of industrial adhesives in Columbus, Ohio. “Many CEOs care deeply about that. They want employees to be happy with the outcome and customers to know that they’ll be served well. They don’t want their businesses to be resold.”

Developing a rapport with CEOs of acquisition candidates is also important, Hoster says: “They know we are quality people and vice versa, so respect and trust are in place even before talks begin.”

2. Ownership structure

Most private-equity buyers prefer to acquire a portion of a company, depending on company size, risk, opportunity, and owner preferences. They try to align their financial goals with those of the owners so there’s mutual incentive to create value.

Industry buyers, however, usually acquire 100% of a company. If the industry buyers are publicly traded with high-valued stock, they often prefer to use their stock as currency.

An industry buyer’s deal is typically static — except for any contingency payments, you are “cashing out.” Yet with a private-equity buyer, there will be a second liquidity event, which can include the equity you retained.

Tip: Private-equity buyers are often the high bidders — after all, they buy thousands of companies annually. When an industry buyer does outbid a private-equity buyer, the difference isn’t much.

A little-known hybrid. A handful of private-equity buyers are publicly traded. Along with the traditional benefits of public-equity buyers, these groups can acquire businesses using their public company stock. This can provide major tax savings to sellers when deals are tax-free, stock-for-stock exchanges. As public companies, their activities are more transparent than typical private-equity buyers.

Many CEOs sell equity in their companies and reduce risk by spreading the sale proceeds over many new investments with their publicly traded private-equity buyer. This occurs when their stock pays a dividend and is based upon a well-diversified portfolio of investments.

3. Company culture and legacy

Finding the right buyer gives your company new resources (such as abundant capital or access to key accounts), the ability to cut costs, or a combination of the two. Although purchasing economies is exciting, cost cutting can reach unpleasant extremes such as shuttering, assimilation and mass layoffs.

Aggressive cost cutting is one way that large industry buyers are able to outbid private-equity buyers. The new owner might derive the extra dollars he pays you by abandoning your employees and community. As a result, many CEOs who are concerned about their legacy and philanthropy prefer to sell to a less-intrusive, similar-sized industry or private-equity buyer.

Tip: A small company may find its best buyer is a staunch competitor that wishes to vaporize a foe or seeks tuck-in acquisitions of product lines or regional offices. The value gap here can be big: You choose between a fair price from a competitor or a fire sale to a buyer with less to gain.

Jack Evans, CEO of Evans Cooling Systems, a $2 million company in Sharon, Conn., believes that selling to another coolant company is the best way to go. “We’ve been R&D focused for 10 years, so maximizing the bottom line has not been our goal,” Evans says, explaining that his firm has now perfected and patented technologies to revolutionize his industry. “Our best deal will come from an industry buyer who will pay cash and royalties for the windfall we offer, who can speed us to market with existing distribution and big-brand credibility, and who can sustain our company’s achievements.”

4. Mix of liquidity and opportunity

The thought of working for others may cause you to dread selling your business. A buyout can bring a marked change in your:

• Pride of ownership.
• Customary work energy.
• Degree of leadership autonomy.

For some CEOs, an attractive alternative is a gradual exit facilitated by a private-equity buyer. For example, a private-equity buyer shares your vision of an exciting “next level” for your company and buys into that vision, granting you partial liquidity. You become their platform company for growth. Another scenario: A private-equity buyer woos you to join an existing platform company in which they have invested. You remain valued for the continued stewardship of your company.

With either case, you sell some equity today, the rest in the future. It’s common to become re-energized in a private-equity venture (unless you’re burned out). It can be a lucrative, exciting approach to liquidity.

Tip: Selling to either an industry or private-equity buyer means staying on, at least through a transition period. “Handing over the keys” at closing is unrealistic. If you insist, you will sacrifice value, as buyers will discount for the added risk of your abrupt departure.

5. Closing obstacles

Because many industry buyers acquire infrequently, they are less savvy with the process. Publicly traded industry buyers heed their quarterly earnings and stock prices; a dip in share price may suddenly make a stock proposal too costly, while a dip in earnings might postpone or cancel the deal.

By contrast, closing deals is a core competency of private-equity buyers, who have fewer variables with which to contend. Most have raised funds previously and have close relationships with lenders and deal experts to drive the deal home.

For this reason, industry buyers backed by private-equity groups can be the best of both worlds. As industry buye
rs, they offer an operating fit for your company; with private-equity partners, they bring the added ability and focus to get deals done.

Writer: Alexander G. Watson is president of Level Next Inc., a Petoskey, Mich.-based business-development adviser and acquisition intermediary. awatson@levelnextinc.com