Mergers and Acquisitions For Dummies (33 page)

Because the odds of successfully closing a deal increase with a larger number of targets, you want a good-sized list. But how many make a good-sized target list?

Buyers:
For Buyers, I recommend a target list of 75 to 100 Sellers. Depending on the particularities of the industry and general market conditions, a suitable list may be 50, but I don't recommend going below that if you're serious about closing a deal. If you're seeking to make multiple acquisitions over a period of time, you're better off with a list of at least 100 targets. If this list doesn't result in a successful transaction, review your assumptions and perhaps change your search criteria.

Sellers:
For Sellers, I recommend a target list of at least 100 Buyers. A list of at least 100 qualified targets increases the likelihood of receiving multiple offers — the more targets you have the greater the odds you'll receive offers.

In both cases, I caution against the target list being much higher than 125; the larger the list, the more difficult managing that list is.

However, your target list may wind up with more than 125. As you make calls, you may discover a company on your list is actually a subsidiary of a parent, and you need to add the parent to the list. Or the parent is on your list but you end up dealing with someone at one of the subsidiaries, which you also have to add.

Should I include competitors?

The competitor issue is a tricky one. Companies are wary of divulging proprietary information to competitors for fear that a competitor will use the information against them in the competition for customers. And they're right for having a healthy amount of hesitation.

That disclaimer aside, contacting competitors usually doesn't create a problem for Buyers. Think about it. Letting your competitors know that you're so successful that you're poised to make acquisitions isn't likely to create any fallout.

For Sellers, on the other hand, letting the “we're selling” cat out of the bag can be disastrous, even if proprietary information doesn't change hands. Having a competitor find out your company is for sale (or even possibly for sale) can wreak havoc on your operations because that competitor may be able to scare customers away.

If you're selling, make sure you have a strong confidentiality agreement in place before proceeding with any discussion about selling your company. If an executive contacts a competitor with a message of “we're for sale, but we need you to sign a confidentiality agreement first,” the damage is done. The competitor is under no obligation to sign anything and therefore isn't under any obligation to refrain from disclosing that the company is for sale. Chapter 7 gives you the lowdown on confidentiality considerations.

Although a confidentiality agreement is a key step before divulging proprietary information, the cat is out of the bag.

Hiring an intermediary is an absolute must if you're going to contact competitors with the message that your company is for sale. Because a nonemployee of the company (the intermediary) is making the contact, the competitor doesn't know the identity of the company until the confidentiality agreement is in place.

Should I acquire or sell to a vendor or customer?

The main question here is one of vertical integration.
Vertical integration
is your supply chain. That's it. If you do an M&A deal with an entity above or below you on that chain, you're integrating vertically.

For example, if your company is a paint distributor that sells paint to retail stores, the manufacturers are your vendors and the retail stores are your customers. If you want to sell your paint distributor, you may consider contacting your suppliers, the paint manufacturers, thinking they may be interested in doing their own distribution.

In most cases, however, the paint manufacturers probably don't want to get into the distribution business because distribution means carrying many different types of brands. The paint manufacturers would inherently have a conflict of interest: They would want to sell their own products and would have little or no incentive to sell a competitor's brand. Plus, the competitors would be less inclined to sell to the manufacturer-owned distributor, likely lowering revenue and profits.

Or maybe you think to target one of your customers, such as a retail store chain. Although the retail chain may be able to cut out some costs by acquiring a distributor, the reduction in costs to the retail stores would come at the cost of reduced profits to the distribution business, making acquiring that business less lucrative. And other retail stores may decide to find another paint distributor, thus further reducing the revenues and profits of the acquired distribution business.

Sellers on Your Mark: Contacting Buyers

Here's the skinny, the honest-to-Elvis truth, the bottom line: Some companies are sitting by their phones like a high-school girl waiting for an erstwhile date to call. But they aren't waiting to see whether Johnny wants to buy them a soda; they're hoping to hear from a company that's looking to sell.

These waiting-by-the-phone companies come in two types:
private equity
(PE) firms (which are basically pools of money seeking to buy companies) and strategic buyers.

Strategic Buyers can be a little more difficult to navigate, and the larger the firm, the more complex the hunt. But almost all buying companies will hear the sales pitch of another company that's for sale. The following sections show you how to get your foot in the door with the right person and what to say after you do.

Resist the urge to e-mail a target before calling. Most people consider e-mails from people they don't know spam and delete them sight unseen. And the recipient may not even be an employee of the company! For best results, have a phone call be your first contact with the organization. Have a conversation. Determine the appropriate person to speak to. Leave a voice mail if you have to. After you determine your target actually works for the company, and especially after you've left a message, a follow-up e-mail may not be a bad idea. But make the call first.

Speaking with the right person

Speaking with the right person seems like a basic tenet of making a sales call, but you'd be surprised how many people simply (and often nervously) plow through their script to whoever first picks up the phone. Bad idea; you just waste time. Instead, follow the lead in the following sections.

Phoning a PE firm

Finding the right person to speak with at a PE firm isn't difficult. Anyone will take your call. Despite managing hundreds of millions of dollars or even billions of dollars in capital, PE firms are often small (in terms of staffers), and everyone at a PE firm knows why he's there: to buy companies.

I recommend doing a little bit of homework prior to calling a PE firm. Look at the Web site, which often lists the firm's portfolio companies and/or its areas of interest, sometimes along with the specific partner who handles a specific area. If you can determine the correct person, call that person. If you're not sure, simply dial the main number at the PE firm and say

Hi, my name is [your name]; I have company for sale. I'm not sure who to talk to; can you help me?

Don't delve into your spiel right away. Most people have a limited attention span; the longer you speak, the less they listen.

The person on the other end will almost certainly be ready to help you and will ask a simple question:

Tell me about the company.

Here's where you need to be concise and to the point, which is why having a script with some talking points is important. (Flip to the later section “Following a script that works” for more on planning this document.) The main, if not only, facts you want to convey at this time are product/service, customer of that product/service, revenues, and EBITDA. That's it. That's all an employee of a PE firm needs to be able to route you to the correct person.