The pundits are proclaiming this is a great time for owners to sell their business. But even when market conditions look favorable, many companies get stumped by one of the most common questions: Am I choosing the right buyer for my business?

In this two-part series, I will introduce you to the two types of buyers: Strategic and Financial. We’ll start with strategic buyers.
Let’s first define the strategic buyer. I like this definition, provided by Cody Boyte in an axial.net forum: “Strategic buyers are operating companies that provide products or services and are often competitors, suppliers or customers of your firm.”

Strategic buyers come in all shapes and sizes. They may be a large, multinational corporation that has achieved growth through acquisitions, diversifying within their own industry and expanding their product and services. Or, they might be a small to mid-size business looking to acquire an even smaller business that holds strategic value for future growth. To fnd out how these buyers approach acquisitions, I posed some questions to strategics, as well as their advisors:

When is it smart to go with a strategic buyer?

John Mattes, Vice President, Taylor Corporation
Typically, the strategic buyer will realize more synergies, get a faster ROI, and, most importantly, be willing to pay more.

They usually don’t finance the deal by putting debt on the balance sheet and, as a result, will have more capital to invest in your facility, equipment, technology, and employees post-close.

Strategic buyers can close faster and with fewer surprises because they understand your business. They can also provide you with more career opportunities to offer your employees and more products and services to offer your customers, strengthening the relationships. And with a strategic buyer, it’s a one-and-done deal. The business won’t be resold in a few years like it will with a financial buyer.

Tom Spina, President/CEO, Luminer Converting Group
At the top of the list, selling to a strategic buyer creates personal contact between owners; especially when both buyer and seller are fairly small. The interaction between two owners of small businesses leads to the continuity of customers. Also, if the owner wants to maintain involvement, they may have that option with a strategic buyer, who is living the same life as the seller. We’re behind a desk in an office – we’re down in the trenches with our middle management and press people.

Todd Kennedy, COO, The Kennedy Group
The cultural fit is a big one. As a seller, you want to understand what’s going to happen to your business. It’s like it’s your child. You want to know what their wishes are post-transaction. Is the building going to stay there? Will the employees be taken care of?  You’ll want to ask if the folks looking at your business feel culturally right. Do their philosophies feel right? You’ve got to feel good about it.

Dan Thome, Founder, Founder, Axiom Advisors, LLC
If the industry is in a consolidation phase, the pricing from a strategic buyer likely could exceed that of a private equity buyer. That’s if the target company fits the consolidation profile and the owner does not limit the strategic buyer from obtaining both revenue and cost synergies from the acquisition.

What do you need to have in place to work with a strategic buyer?

Spina: The biggest problems we’ve found is that small business owners are not preparing their financials. From a current and a historical point of view, many sellers simply don’t have the financial statements that allow you to look deep into their financial picture to make sense of the business. An owner of any small business should have at least three years of reviewed financials from a reputable CPA firm. Yes, it costs money now, but it will pay dividends later.

Kennedy: Besides the financial statements, an owner needs to be able to understand and present how a business runs to a strategic buyer. Where is the customer concentration? What’s the age of the equipment – and the capabilities. Is there a good management team in place? There needs to be someone running the day-to-day effectively.

Mattes: Because a strategic buyer is in your business, be prepared for them to really drill-down, and go deeper into what’s making your business work. With a financial buyer, you need to have more patience to explain the business to them.

Thome: Having a product capability or offering that either fits well with or extends the depth and breadth of the strategic buyer (and eliminates a competitor) is especially interesting. If the target has intellectual property or key personnel that are valued, that as well could be a reason for strategic interest.

From a strategic buyer’s perspective, what is your take on the current marketplace – is it the right time to sell?

Kennedy: It is really a personal choice and what the owner wishes to do. Only he or she knows when the “right time” is. There is a fair amount of active looking. The thing we struggle with is value expectations of the owners at this size level. They want to talk about crazy multiples, but those rules don’t apply to smaller businesses like they do with large businesses.

That is why we encourage owners of the business to hire a professional accountant or banking firm who has M&A experience. Your run-of-the-mill accountant who does the books is not the right guy to advise on M&A valuations – it is a specialized area. Find a good accounting firm that has experience in business valuations and M&As, so they can provide proper business value advice to the owners.

Mattes: It’s a good time to sell.  Valuations are fair and holding steady. It’s not a volatile market.  There’s a lot of cash on hand, and lenders are willing to lend now. Further, there doesn’t appear to be anything looming in the way of tax law changes.

Spina: The world says it’s a good time to sell. Certainly the large conglomerates are hungry for growth, and are growing by M&A. Private equity companies are flush with cash so they are buying packaging companies. Corporate America can buy at a low interest rate, which is driving prices up. It appears to be a good time to sell. Business brokers are spouting out multiples which are extremely high and may not be real in the world of small business. Small business owners should have realistic expectations.

What is critical to consider if this is your first experience with an M&A?

Thome: Be ready. Consider an exercise in pre-sale planning (sometimes referred to as reverse due diligence) with a qualified provider of these services. Can you supply the information that a buyer would ask for? Owners have not always thought about this far enough in advance. Get the appropriate management in place so you can sell to either strategic or PE firms.

Mattes: Ask yourself why you really want to sell and what it will be like when you’re no longer the owner. What are your deal-breakers and tie-breakers? When you have clarity before the process begins, it’ll be a much easier process. Still, be prepared for a lot of work because selling a business and running a business are two, full-time jobs.

Surround yourself with legal and financial advisors with M&A expertise. Get the guys who really know how to do deals. Yes, it will cost you money, but it will optimize your value.

Spina: Think about what are the near-term and medium-term plans for your business. First, do you want it at its current location or are you willing to let it be moved? Do you plan on maintaining employees? Typically small shops which have been around a long time have an intimate relationship with employees. They don’t want to exit and leave employees behind. Second, the seller must be upfront with any customer situation. If they have a large percentage of business in one area, they better be upfront with the buyer about their large accounts. What should that buyer expect? How solid are those accounts? If the selling owner is aware of any upcoming changes, this should all be put on the table before final closing discussions or it won’t make for a pleasant closing, or post-closing relationship.

Kennedy: It’s an important and time-consuming process. Be prepared for it. Make sure you can engage in the process while maintaining your customers and keeping your business on track. You may have to add staff to keep the business running.

In the next Bottom Line, we’ll take a closer look at the private equity buyers.




Rock LaManna, President and CEO of LaManna Alliance, helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. Rock can be reached by email at [email protected].