Baby boomers are getting older and will retire. In recent years, an even greater backlog has been building.

Get ready. This coiled spring must bounce back!

Baby boomer business owners are becoming increasingly frustrated with meddling governments, economic volatility and depressed market conditions. They are doing more for less. They face the prospect of either sitting tight for many years hoping their values will rise on the back of rising profits; or biting the bullet and selling sooner.
Those who are in a position to sell now should do so, before the inevitable rush starts. Even as profits rise (which they should do), the increasing supply of good businesses will put downward pressure on multiples, offsetting the gains to some extent.

• 80% of Australian and NZ businesses are privately-owned, with a total value in the trillions.
• An estimated $3 trillion worth of family businesses will change hands over the next 10 years.
• In Aust/NZ, most will exit by outright sale. This presents a huge market opportunity.

We and many others have been saying this for 10 years… and it is still true today, only more-so. The coiled spring is loaded and must bounce back!

The signs of a boom in transaction volumes are starting now, with increasing numbers of businesses now being prepared for sale. The blossoming succession and exit planning industries are further signs of the imminent activity.

This represents a huge opportunity for appropriately qualified professionals.

Interestingly, as many clients’ accountants share similar age brackets with their clients, they are in the same boat!

With a strong and growing national advisor network, Divest Merge Acquire is well positioned in the $1M+ enterprise value M&A market.

Prepare now and help your clients beat the rush. Hit the ground running as a Divest Merge Acquire Member Firm.

Enquire now at ask@divestma.com; or visit
https://divestmergeacquire.com/partner/#member-firm for more information.

Please feel welcome to add your comments and/or share with your colleagues.

The holy grail of business opportunity marketing is to quickly and efficiently reach large numbers of target investors. With the right strategy and resources, this can be far simpler than most advisors expect.

This article sets out some of the alternatives available to marketers of business opportunities.Target investors are those who place the most strategic value on a business, with the lowest level of associated risk. As a result, they are often more committed to a process, and are likely to pay more than buyers without a strategic interest (i.e. general investors who attach no strategic value and are therefore more focussed on return from a standalone business).

Examples of target investors include:

• Existing industry players: Larger competitors, or those of a similar size with the capacity to fund an acquisition and who can leverage off customers, suppliers, technology, distribution channels etc.
• Private Equity firms: Currently participating in, or looking to enter the industry. PE Firms often have a wider agenda in mind than just one firm, reducing their portfolio risk and adding strategic value to each acquisition.

The benefits of targeting strategic investors in large numbers are obvious:

• Creates a competitive process where a strong contingent of prospective purchasers respond and are considering the opportunity simultaneously;

• Generally attracts more sophisticated, experienced buyers – critical to a smooth transaction;
• Clients can clearly see how effective the marketing has been and can more confidently accept the ensuing negotiations and offers as being representative of the market.

The result usually transfers into receiving a greater number of reasonable offers that the vendor is prepared to accept, so a deal is more likely to be done.

Despite this, surprisingly few M&A advisory firms seem to have risen to the challenge and invested in effective capabilities to reach their targets.

Let’s look at some of the alternatives available to marketers of business opportunities.

 

1. Mass-marketing (non-targeted, expensive).

Mass marketing involves press or other similar high profile forms of publicity. Many a client has seen their money wasted on expensive press advertising only to see little or no responses from each ‘hit’.

These forays may cost more than $2,500 each and appear for one day in specific publications.

This would rank as the most costly and least effective of all marketing activities of business opportunities.

The chances of a target, or one of their colleagues, seeing the advert are very slim indeed.

 

2.  Individual targets with tailored information (highly-targeted, very time consuming).

Most boutique M&A advisory firms, accountants or others who market SME’s in the $1M-$50M market may rely on a significant amount of research to produce a very limited number of targets.

Called the ‘hunt and peck’ method (coined from how some people type on a keyboard: one painful letter at a time), this involves an analyst manually researching key words or trolling through past correspondence for possible matches.

Sometimes the fruit of this process is a list of half a dozen or so prospects, which can be made aware of the opportunity directly (i.e. cold calling, email, tailored proposals).

The advisory firm may get lucky and reach an interested party and a process can start. But if their interest falls off, the process can easily stall until they do another round of hunting and pecking.

How can clients be confident their business opportunity has been presented to a representative market, you might ask?

And how do they know if they have achieved the best possible outcome from such a process?

While this approach certainly has its merits in the context of a wider marketing strategy, particularly in the larger end of town with businesses of a $50M+ Enterprise Value (EV) where the number of strategic buyers decreases significantly, it is highly inefficient and limiting in the $1M-$50M EV segment.

Accountants or others embarking on such a process could be letting their clients down if they represent that they have the means and expertise to properly market their client’s business. The risks are clearly greater once they step onto this very specialised field without the right equipment.

 

3.  Websites (non-targeted, lower cost, lower quality of respondents).

Internet marketing has largely replaced press as the preferred large scale marketing medium.

Not only are adverts relatively low cost, but they are available to be seen 24/7 and can be searched using key words. Leading sites also have the facility where purchasers can enter their areas of interest and be contacted when a match is uploaded.

Another benefit is that their market reach is worldwide, to cover overseas investors targeting particular business profiles.

To those without other marketing resources (per below), website marketing represents a relatively attractive generic way to achieve some market coverage.

The shortcomings are that it is a comparatively passive form of marketing, where the information is ‘put out there’ and it is up to those performing active searches to find it and respond. This will reach those whom are motivated enough to search and subsequently respond, but more importantly, it misses those who may not use internet searches and who would be interested but are not actively searching then and there.

4.  Direct targeted marketing (with the right resource)

In Divest Merge Acquire’s experience, the most effective way to market a business in the value range $1M-$50M is via direct targeted marketing to key industry players. This involves distributing a large number of letters/emails to key industry players identified to have potential strategic interest in each particular business opportunity.

The benefits of targeted industry marketing are clear:

• High number of strategic buyers contacted;

• Faster process and more target responses in a short timeframe;

• Contact not only buyers who are actively seeking acquisitions, but also those who fit the target profile but may not be currently looking;
• Drive a more competitive process with a larger number of target buyers in the process, facilitating a faster transaction and maximising vendor outcomes.

 

This all leads to higher conversion/success rates.

However, such targeted marketing requires a database tailored specifically for M&A activities, containing:

• Readily searchable and actionable contact points for particular industries, regions or groups;

• Ability to stratify contacts by key industry classification or demographics to allow only targeted groups to be contacted;

• Current, relevant data;

• Ability to readily determine each target organisation’s M&A aspirations;
• Database accuracy and usefulness that increases with regular activity.

While it may be possible (albeit, at significant cost) to acquire, build or otherwise access a database of names and addresses, the real power of such a database lies in the accumulated history and parameters it has recorded to determine each target organisation’s M&A aspirations.

Marketing Strategy

The best strategy is a combination of 2, 3 and 4 to cover the local, national and global markets; and gain the attention of not only those purchasers actively looking, but those not currently seeking an opportunity (i.e. draw buyers to the market).

How does Divest Merge Acquire market business opportunities?

The answer: a combination of the above approaches.

While Divest Merge Acquire posts all opportunities on high profile websites, this historically generates fewer than 14% of all final buyers. Whilst the results from website marketing leaves much to be desired, the primary value in these entries is to make the opportunity more visible to overseas purchasers who generally look first to the most mainstream marketing channels available in a target country.

The bulk of Divest Merge Acquire’s marketing muscle lies in its database marketing capabilities. Divest Merge Acquire has developed an effective integrated M&A database and marketing system.  Millions of dollars have been invested over more than a decade in developing and maintaining Divest Merge Acquire’s database.

Having such a database provides a key point of differentiation and, when integrated with Divest Merge Acquire’s extensive systems and procedures, poses a significant barrier to entry for those seeking to efficiently carry out M&A activities in the $1M-$50M market segment.

This platform lends itself to being further leveraged, as the benefits are exponential. The more the database is used, the more accurate and useful it becomes.

• An effective direct marketing process involves sending direct letters or emails to 1,000-2,000 companies targeted by a Standard Industry Classification (SIC) or equivalent;

• These processes deliver an average of 40 targeted prospective purchasers for each business opportunity taken to market;
  • Developed to define market (Aus & NZ business with > 10 employees);

• Actively maintained and current;

• Currently contains 176,000 address book entries categorised as follows:
  • Prospective candidates for divestment or merger;

• Prospective Purchaser;

• Referrors;

• Relevant industry SIC Codes attached to all entries;

• Key data on each company and individual (across 88 active fields);

• Online accumulated history and investment parameters for active purchasers.

 

Other benefits

The database can also be used just as effectively as the basis of performing targeted acquisition searches on behalf of those who know what they are looking for and to attract onto the market prospective targets who would like to sell but who have not taken the substantial step of going to market.

When selling a business, marketing the opportunity with a price attached provides potential investors with important information relating to the size and profile of the business. However, formalising price expectations also serves to set the ‘high bar’ from which interested acquirers will naturally seek to negotiate downwards, all but eliminating the potential upside of any special value strategic buyers will place on the opportunity.

Most SME’s are marketed for sale at a specific price.

The key benefit of setting a price is to simplify the initial qualifying process by establishing a clear profile of the business and expectations from the outset.

This allows prospective buyers to better qualify an opportunity at an earlier stage. By providing the market with this information, interested parties know the rough size and value of the business so they can quickly determine whether it is likely to be of a suitable size.

Buyers without the capacity to fund the acquisition are less likely to enquire as they have a benchmark understanding of pricing expectations;

Setting a target price is most effective where the price is supported by historical performance. As long as the multiple applied is consistent with market expectations, taking into account any factors unique to the particular business, reasonable buyers should arrive at a valuation in or near the target range. If a vendor’s expectations are reasonable in relation to historic results and the growth profile of the business is consistent or steady, nominating an asking price can promote a quick and efficient process.

On the downside, as in any negotiation, nominating a specific asking price usually invites buyers to adopt this as the upper end of a range, establishing the expectation that vendors are negotiable down from that figure.

Consequently, most businesses are marketed at the top end of an indicative valuation range, with the degree to which the vendor is negotiable remaining unstated.

When to invite Expressions of Interest

There are circumstances when it may be more advantageous to market a business without setting a specific price, by inviting EOI (Expressions of Interest).

In general, marketing under EOI is recommended in situations when the price expectation cannot be supported purely by historical trading results. This may occur when:

• there is a significant component of IP (Intellectual Property) in the pricing expectation and the seller is hunting for blue sky;

• the forecasts are significantly higher than historical results, and the maintainable earnings cannot easily be determined;

• a business is of additional strategic benefit to an individual or group of buyers;
• the market has the potential to drive the price above expectations.

Under these scenarios, it can be very difficult to determine a marketable price expectation as the basis for valuation is no longer simply the businesses historical performance. Compounding this, as the total enterprise value placed on the business may differ significantly between buyers, setting the price could unnecessarily ‘cap’ the ultimate sale price.

Buyers from the same industry are more likely to value the business more highly as a bolt-on, versus an investor who is primarily focussed on price and who values the business on a standalone basis with little or no expected leverage.

Buyers can and should work out their own offer range according to the value of the business to them. If their valuation is significantly below an established asking price, they may not proceed further, as they may assume the vendor’s pricing expectations are unreasonable.

Disadvantages of adopting EOI include:

• Buyers have no idea about the size of the business and the price expectation until further information is provided.

• The process is less efficient, as an extra step or two needs to be taken with each buyer.
• EOI may deter buyers who are unsure of the vendor’s price expectations. An opportunity with no pricing expectation may fall into the ‘too hard basket’ and miss out on enquiries from target buyers. Experienced buyers may have been burned in the past investing time and money into a process only to find the seller’s expectations to be unrealistic. Accordingly, they may perceive a process with no stated pricing expectation as too difficult.

When marketing under EOI, it is highly recommended that buyers are provided with high-level price guidance, usually in the form of in interim response note indicating a price ‘upwards of’. This effectively sets a floor price without nominating a ceiling.

Some M&A advisors believe an EOI process needs to be accompanied by an ‘offers by’ date. However, it is worth considering that setting a deadline may result in having to make embarrassing extensions that draw attention to a situation where acceptable offers have not been received within the timeframe. It also tends to delay the best organised buyers and push them into a slower timeframe. As a result, a set timeframe for offers is often not the best option – unless there is an unusually tight time requirement placed on the process by the vendor.

Divest Merge Acquire’s approach is to work to the highest common denominator, rather than the lowest. Accordingly, we adopt the same approach to timing regardless of whether a specific price or EOI is chosen: We prefer to leave the process open ended. Then, when an offer is received, we inform all other interested parties that an offer has been received and that it is being seriously considered by the vendor. We encourage them to move more quickly if they intend proceeding further, so their offer can be considered simultaneously.

DMA interacts with a wide spectrum of business acquirers, from high net worth individuals, to private and public companies and private equity firms.

Whilst many would-be investors are spooked by global economic uncertainty, astute players are seizing the opportunity the current market presents to forge ahead with their acquisition plans. For them, the acquisition of strategically attractive businesses is their primary means of aggressively building value and achieving accelerated growth regardless of immediate uncertainty.

Contrary to general perception, astute buyers see huge opportunity to acquire strong, sustainable businesses and are prepared to pay fair prices.

Early out of the blocks have been private equity firms and high net worth investors who are flush with funds and have the meters ticking over on their portfolios. They are constantly scouring the market for opportunities. Divest Merge Acquire is advising buyers and sellers on a growing number of engagements involving leading PE firms.

Many investors have engaged Divest Merge Acquire to search for and qualify businesses meeting their particular requirements.

Many businesses are recovering from recent unfavourable trading conditions and are looking forward to a much stronger year ahead now their order books are filling.

For business owners whose businesses have been performing below the long term maintainable earnings level, selling on a staged or structured payment program is providing a workable balance to minimise risk to the buyers and achieving a respectable overall price for exiting business owners.

Businesses in the SME market can generally be acquired at values that represent between 3 and 4 times earnings before interest and tax (EBIT), which translates to returns of between 30% and 25% pa. These are base levels and most strategic investors intend growing or leveraging their investments with others. They may also gear them with debt, often realising much greater real returns on their funds invested.

Astute investors recognise these kinds of returns are more attractive than other forms of investment, but can be higher risk and need to be actively managed. The safest businesses to acquire are those in industries where the investors have least risk and most to gain – usually industries they already operate in and understand.

Divest Merge Acquire is now seeing a growing line-up of transactions set to complete in the near future.

It is important for business owners who intend selling in the future to understand the motivations of prospective purchasers and the dynamics of the markets in which they operate.

Purchasers of businesses for more than $1M have been grouped into broad categories according to their investment strategy and funding mechanism. Many investors are hybrids or combinations of these. Some investment criteria are common to all groups.

The categories are shown discretely to simplify this discussion.

Public companies

The public company arena has industry consolidators in virtually every industry sector. These are strategic investors who are expanding through acquisition, usually in their core industry.

Public companies operate with a different set of business dynamics to private companies. Typically in private companies, profit is the driver of growth and investment and shareholder value is a secondary consideration. In contrast, public companies focus on increasing shareholder value.

As with private companies, acquisition is the fastest growth mechanism for a public company. However, the benefit is multiplied several times. Not only does the acquired business bring its profit into the public company as the primary benefit, but there is a much greater secondary effect.

The returns required by the shareholders of public companies are usually much lower than for equivalent private companies. The rigorous reporting requirements, greater share liquidity, increased availability of investors and access to them usually drives the price of the shares much higher than for a private company with an equivalent profit.

The capitalisation rate applicable to a business is also referred to as the Price/Earnings ratio (PE ratio). PE ratios vary widely, but could be in the range of 10-20. This is on after-tax earnings, which is important to shareholders. A PE ratio of 18 might be comparable to a pretax earnings multiple of 12.

Now is the interesting part. If a public company with a PE ratio of 18 acquires a private business earning $1.4Mpa in pre-tax profit (EBIT) at 4 times multiple, it would acquire the business for $5.6M. However, as soon as it does, the investment has a theoretical value to the public company of $18M ($1.4M less tax equals $1M after tax, multiplied by 18), which is more than 3 times the investment price.

Assuming the public company can access substantial amounts of capital, it can dramatically increase shareholder value simply by making acquisitions. The profit of the acquired business does not need to increase for an acquisition to be successful. It could even decline to some extent and the public company would still be able to ‘create’ significant shareholder value from the transaction.

The more successful acquisitions the public company makes, the faster shareholder value increases. Delighted shareholders continue to pour money into the company, providing a ready source of funds for further acquisitions, driving the PE ratio even higher and fuelling even faster growth and higher returns.

Public companies that adopt this business model may need to continue to make acquisitions to meet shareholder expectations; i.e. to maintain the growth rates shareholders expect and have already factored into the share price. This process can continue as long as the company can continue making acquisitions. Readers may know of organisations in their industry that have adopted this strategy.

It is important for prospective vendors to understand that public companies will not pay more for acquisitions than they believe they need to, as there may be a virtually limitless supply of acquisition targets. Although in some industries the voracious appetite of consolidators has driven the market price of targets higher, this does not occur in most industries.

Private equity funds

A small but increasing proportion of the $billions invested in super funds is allocated to private equity funds to pursue business opportunities.

Private equity funds understand the leverage mechanisms involved between private and public companies and often position themselves in the sweet spot, right between the two.

Private equity funds can access funds and become industry consolidators in much the same way as public companies can. Many are very good at making acquisitions of private companies in a target industry, combining or consolidating them and installing competent management and infrastructure, running them for a few years and then exiting though an IPO or a trade sale. Many work to a timeframe of 3-5 years in such an industry play.

Private equity firms are run by very capable people as a rule. If the strategy is right and it is executed skilfully, the returns to these firms and their investors are often astounding.

The typical private equity fund looks for investment opportunities with:

• Good team
• Proven and scalable business model
• Growth industry
• Financials:

– Revenues over $5M

– EBIT over $1M

• Ability to grow revenues to greater than $50M in 3-5 years
• Exit strategy identified

Medium and large private corporations – same or related industry
The main volume of industry acquisitions and consolidations takes place among medium and large private companies. Funds permitting, private companies are among those who will pay the most, as they have the most to gain and the least to risk.

Industry players can also grow much faster through acquisition than organically. They may want to expand into new geographic or strategic markets or bulk up for a future IPO, which may require them to increase sales to more than $50M. Acquisitions can deliver fast track expansion geographically, vertically and horizontally. Other reasons include acquisition of intellectual property, technology or entry to complementary markets, removal of a competitor or to gain access to key customers or supply contracts.

Most benefits of industry acquisition are in the form of market leverage:

• Leverage off target’s customer base with existing products
• Leverage off existing customer base with target’s products

The strategic and cultural fit will be important, as this will determine the amount of work required to merge the businesses and capitalise on the increased size and scale of operations.

If the strategic fit is good, it is usually quicker and cheaper to acquire a business already established and doing what the purchaser wants to be doing, complete with infrastructure, team and customers.

Private investors

These are high net worth individuals or consortiums of successful business people with surplus cash to invest to earn higher returns than from other forms of investment. Most private investors have a clear strategy for adding value and a mechanism for doing so.

They may seek businesses that are underperforming. The business may be undercapitalised, under-resourced or not well managed. It may have good management and sound growth plans but lack the funds to grow. They identify and provide the missing ingredients so the business can grow quickly.

Purchasers from the same industry would expect to leverage the business with others. If not, they may settle for a high, stable return. Accordingly, they can be very price-sensitive and adopt hurdle rates of return as their initial qualifier for business assessment. Often, ahead of strategic considerations, the first question is price vs profit.

Investors not from the same industry generally want the current owners/managers to continue to run the business. This may suit vendors who want to cash out and are prepared to stay involved.