Chasing the elusive strategic buyer!

Author: Simon Heath, Managing Partner, Heligan Corporate Finance

When considering a sale of your business, the holy grail of any transaction is to find a strategic buyer that will ultimately pay a strategic price for a company, but what does that actually mean?

Most businesses when marketed for sale find a buyer, but is it really a strategic buyer?  Business owners, after nurturing an idea, bringing a concept to life, making it commercially viable and all the hours of toil and hard work in growing it, rightly want to maximise their value through this often once in a lifetime transaction. A thoroughly prepared business in a well-managed process will drive value.  These should be considered as must-haves in addressing the following multi-faceted themes: 

• Preparation for sale: Presenting the best version of your business, ensuring corporate structure, governance, commercials and all other aspects have been reviewed and addressed prior to a potential sale. 
• Diligence ready financial data: Integrated data cube with three years historical and forecast financial information that reconciles back to the company trial balance will be the basis of the sales documentation and financial due diligence.
• Company growth: Improving revenue and profitability through the sale process will provide confidence to the buyer.
• Market growth: Buyers will expect the market in which a company operates to have growth characteristics.  A declining market will always limit a business even if it has the best product or service. 
• Barriers to entry: Whether legislative or regulatory, skills or intellectual or provision of a differentiated offering, making your business difficult to replicate will increase its value. 
• Strong management team: Exiting shareholders that also hold senior management positions can present succession or transition issues for a buyer.  Through appointing a professional management team, this risk is mitigated and facilitates a more straightforward exit for shareholders. 

All of these factors increase the importance and value of a business but to achieve a strategic premium, it is important to look beyond good transaction governance and process.  Additional strategic factors include:

• Revenue synergies: Buyers are by definition larger and will have broader distribution channels to sell your products or services. Identifying how a buyer can scale up your business through capital investment and access to the broader market can demonstrate the true value to them. 
• Cost or supply chain synergies: Buyers should have greater purchasing power and achieve better pricing for supply of raw materials and services benefiting the underlying profitability of your company
• Complementary or adjacent services or products: Where a buyer is missing a particular skillset that can amplify their offering, an acquisition can provide a strategic solution rather than organically growing a new division.   
• Geographical in-fill: Is this a new market entrant that needs a platform to ‘land & expand’ and create a meaningful presence in a new jurisdiction.  Platform acquisition opportunities are limited and this scarcity can drive an increased value for a business. 

It is the role of the advisor to articulate the benefits to the buyer of revenue and cost synergies and negotiate a share of the upside with the seller in the shape of improved pricing and structure of a transaction. These combined with clear rationale of why an acquisition is essential to a specific buyer can drive a strategic premium from a strategic buyer.  Ultimately, a well-prepared business, with a clearly defined strategy and demonstrable growth profile sold to a buyer that needs its capabilities will be strategic.