WHO is the best buyer for MY Company?

7 Nov

By:  Huxley Nixon

Unfortunately, there is NO right answer for all situations.  It depends on many factors, but this discussion is limited to two types of third-party buyers: Strategic and Financial.  This blog does not address the issue of the buyer insisting the seller receive a portion of their purchase price in the form of an “earn-out” because both types of buyers employ them.

We focus on these third-party buyers because they are most likely to pay the highest price for your company.


Who are they?

A strategic buyer is a company in your industry or with the desire to enter your industry to accelerate their growth by expanding their product offering and/or geographic reach.  They can be public or private, foreign or domestic and are seeking targets that will be accretive to their stock value immediately.  By efficiently and quickly adding new customers, revenues and intellectual property (if any) they can leverage their existing personnel and infrastructure by “rationalizing” (a nice word for eliminating) unneeded people and infrastructure of the acquired target while accelerating growth.

Strategic buyers can pay a higher price because they do not require many of your existing personnel and facilities (administrative, sales & marketing, and production staff; outdated plant and equipment; etc.).

What happens after the sale?

  • Strategic buyers will “rationalize” the acquired target by terminating the excess personnel and closing inefficient facilities to maximize their profit and accretive benefit to their stock value.
  • Your company “culture” will most surely disappear, but the employees who make the transition will have new opportunities for growth and career advancement in a larger organization.
  • As the seller, you will be expected to remain for an orderly transition period. However, strategic buyers are not interested in your future “wealth creation” other than that agreed upon in the purchase contract.

What do I need to know about strategic buyers in the current market?

Because of the cost savings associated with the termination of personnel and closing of facilities, your company is worth more to a strategic buyer than to one who will need your people, plant and equipment.

Strategic buyers still have approximately $1.2 trillion of dry powder on their balance sheets for acquisitions and they have been the most active buyer segment since 2008 (approximately 85% to 90%).

They are NOT interested in buying less than 100% of the selling company and are NOT interested in backing Management Buyouts or an equity recapitalization.  

Public strategic buyers are not interested in smaller transactions and in general the “Size Premium” applies as it does for the Financial Buyer (see below).

PitchBook expects strategic buyers to be less active in 2012, but all US middle market merger and acquisition activity has slowed dramatically since July 2011, so this may change.


Who are they?

Financial buyers are primarily private equity groups (“PEG’s”), but there are a growing number of alternative financial buyers, such as family offices, or public acquisition corporations.

Financial buyers bring access to financial resources and top industry talent to help the platform achieve its growth objectives, which could not have been achieved by the founder alone.

The days of the “buy and flip” financial buyer are gone!  Today’s buyer adds real value and does not rely on financial engineering to create a quick return as the Buyout firms of the 1980’s and 90’s did. Many of these transactions were over-leveraged, ending up in bankruptcy court if the company hit a bump. Today a financial buyer invests an average of 40%-50% in equity to close a transaction.

What happens after the sale?

  • Financial buyers make a profit by acquiring well-run companies with excellent growth potential that they can use as a “platform” to build upon to maximize the arbitrage available to larger companies upon a sale (see “Size Premium” study results by GF Data below).
  • Unlike a strategic buyer, they align management’s interests with theirs (through performance-based stock options and other equity incentives) and are eager to back quality management teams in Management Buyouts, Leveraged Buyouts and to support CEO/Owners that desire to remain and execute a growth plan and have a second bite of the apple.
  • Financial buyers grow “platform” businesses through acquisitions and/or organic sales growth and then exit through an Initial Public Offering (“IPO”), sale to a third-party (frequently to another PEG) or to management.
  • The average time to acquire, grow and exit a platform investment has grown from 3 to 5.2 years since 2008.

Financial buyers are great at consolidating niche industries and they frequently grow their platform companies through acquiring smaller “bolt-on” companies to broaden the product offering or geographic reach and profitably grow sales, to take advantage of the valuation arbitrage created by the “Size Premium” discussed below.

What do I need to know about financial buyers in the current market?

PEG’s raised over $1 tillion in the last boom cycle (2005-2008) and very little has been spent due to the recession and uncertainty of the economic bottom being reached.

Most PEG’s are limited liability partnerships with a 10-year life and the average midpoint of these funds is the end of 2012.  There are an increasing number of PEG’s and other financial buyers such as public investment corporations that are taking a longer-term view.  These PEG’s can have up to a 25-year life cycle and continue to invest through year 15.  Public Investment Companies have owned portfolio companies for more than four decades.

Since the average hold time for the majority of PEG’s has grown from 3 years to 5.2 years, the 10 year PEG’s must deploy their huge un-invested cash reserve prior to 2013 or risk having to return much of it to the limited partners.  This has created huge pressure to put this cash to work NOW!

“Size Premium” Value GAP has never been WIDER – Andy Greenberg, CEO of GF Data recently commented on pricing trends of US middle market deals:

“I noted that the “size premium” in private equity-sponsored middle market deals had never been wider than in the first quarter of 2011. Within the $10-250 million total enterprise value (TEV) range we cover, valuations averaged 5.4x at $10-50 million of TEV, 7.2x at $50-100 million and 8.5x at $100-250 million….”

SUMMARY & CONCLUSION: Who is the best buyer?

Strategic buyers can pay a high price for your company because they will rationalize the purchase by eliminating excess personnel, property, and facilities. As the owner, you may be asked to participate in an orderly transition period with no additional financial incentive.

Strategic buyers have $1.2 trillion available for acquisitions. However, PitchBook expects strategic buyer acquisitions to decrease in 2012.

Financial buyers/partners derive value by growing ‘platform’ companies with management into bigger companies to take advantage of the “SIZE PREMIUM” upon exit. Company culture is more likely to be kept and a financial buyer is eager to back excellent management teams that want to take some chips off the table today and have a second bite at the apple.

Financial buyers have extensive cash reserves, which will need to be invested in the near-term to meet the necessary investment horizons.

In today’s VERY uncertain economic times an owner considering an exit in the next decade should consider an equity recapitalization with a financial buyer (some will do non-control transactions) and take some chips of the table now while growing the company to a larger critical mass and take a Second Bite in five years.  Click here to see an example of how this scenario unfolded for Bob and his decision to do an equity recapitalization of his $25 million revenue value-add Distribution Company.

Author: Huxley Nixon has been involved in M&A (mergers and acquisitions) for 35 years as a buyer, seller and intermediary.  He is founder of the M&A MARKETPLACE by CHC (www.mamarketplace.com) where the buyer pays all success fees and the process is only 120 days.  For owners of private companies considering a sale of part or all of their company – it provides a very quick, confidential and competitive alternative to current options less transparent and more disruptive for the owner.

DISCLAIMER:  Opinions and conclusions in this post are solely those of the author unless otherwise indicated.  This article is for general information purposes and is not intended to be and should not be taken as advice on any particular matter nor is it intended to be a solicitation regarding any securities transaction and or investment relationship.  For those desiring additional information please visit our website www.mamarketplace.com.

November 7, 2011

One Response to “WHO is the best buyer for MY Company?”


  1. Is an EQUITY RECAP right for MY Company? « SellYourCompany.org - November 7, 2011

    […] “Size Premium” – NEWCO’s TEV has grown from $27.5 million to $59 million at sale date.  Click here to read […]

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