Four types of M&A buyers
Buyers in M&A can be grouped into four personas, based on their motives and experience. Use this to plan how to engage and work through the deal.
I got a call one morning from a former colleague who'd founded a start up. It was great news β he'd had an acquisition approach, after only three years of running the business. It was early days (they hadn't given him a price yet) but he was still super excited.
The first question I asked was:
What kind of buyer is it?
That might seem like a strange question... What does that mean, and why does this matter?
Buyers in M&A can be grouped into four archetypes, like personas. This is based on their motives for buying and how experienced they are at doing deals.
Understanding the type of buyer determines how to engage with them, how to get prepared and what to expect through the process.
If you're starting to engage a buyer, you need to work out which category they are in and plan accordingly.
Let's dig in.
Summary
The first three kinds of buyers are called Strategic Buyers. They already operate in your industry β they could be a competitor, have a product in an adjacent market or operate in the same value chain.
They're buying you to fulfil a part of their strategy, hence the name. See this article for more detail on these strategies: The SIX strategies that drive M&A
Within this group, we further split them based on their history and approach to M&A.
π Serial Acquirer: They've grown their business through M&A, and are actively hunting for more deals. They are very savvy deal-makers with lots of expertise.
π Occasional: They've done some deals in the past, but not many. They are opportunistic β if you fit their mould and the timing is right they could be tempted to buy you.
π First Timer: The M&A virgins. You would be their first ever deal. They are inexperienced, and may be sceptical of M&A.
Lastly, there are the financial buyers.
π Financial: Their business is to buy companies, help them to grow and later sell on for a profit. Private equity falls here.
Let's dive into each of these, understand how they operate and what to expect.
Serial Acquirers
π Strategy
These companies are the most active strategic buyers.
M&A is a proven strategy and they are hungry for more. They've built their business by 'bolting on' acquired businesses. That often buying out competitors to increase their market share, or using acquisitions to grow into new markets or new countries.
These are rare! If they exist in your industry, you will be able to find them easily β they will have left a trail of press releases for previous deals.
π€ Engagement
They are constantly looking for promising investment opportunities.
You might see metrics in their shareholder reporting about how many deals they've evaluated and completed that year β it's a key process for them.
Of all the strategic buyers, these are the most likely to reach out to you proactively. They will have a well-honed process for building and nurturing relationships with potential targets.
If you contact them, they should be very receptive. (See here for tips on how to build relationships with buyers before you're ready to sell).
They are likely to have an M&A or Corporate Development team in-house made up of ex-bankers, accountants, advisors and lawyers. These people will be your initial points of contact. They are supported by teams of advisors on retainer and ready to go.
βοΈ Deal Style
They see a lot of deals, and they know what they are looking for. Their aim is to evaluate potential targets as quickly and efficiently as possible.
They will have certain information that they want to see upfront to help them filter deals through a set of criteria. For example, minimum size (EBITDA) thresholds.
They are organised, and will want to own the process and the timeline. This can seem ruthless and aggressive, but it's just a function of the volume of companies they talk to. They don't like companies that are disorganised or waste their time β they will ditch you and move onto the next target on their list.
Once you're in the flow of the deal, they will likely move quickly through due diligence. They know what to look for β what matters and what doesn't. They have processes for getting Board approval for deals and are experts at navigating through that.
This is all good news. You want a deal that moves quickly, and a buyer that knows what they are doing!
π° Valuation
They will have lots of examples of recent deals (both their own and others in the market) and their valuations and multiples. They will rely heavily on these benchmarks to guide what to pay for your business. They also tend to have guidelines around the multiples they can offer for companies.
Approaches to valuation will vary. But in the general case they are unlikely to waste time with a low-ball offer that's way out of the normal range. Expect an offer that's reasonable but perhaps at the low end β they are savvy and know what they are doing!
π Post Sale
They have learned how to integrate businesses, as they've done this many times before. So expect for them to have a set of standard processes for how they want you to work with other group companies, report financials and integrate into the group. There might not be a great deal of wiggle room.
A side point β if M&A is key to them, they will be wary of protecting their reputation amongst founders. They are less likely to mess you around during an earn out as a result.
π Benefits
Of all the buyers, this group has the highest chance of closing the deal. You're dealing with professionals. They will move quickly through the process and won't waste your time.
π Risks
On the flip side of the above... they are savvy and smart, and have a huge amount of deal experience. So there's a risk you get trampled on through the negotiations if their expertise far outweighs yours.
You will feel like you're moving through their machine, and they are setting the pace. So be prepared for that.
β Tips
Get organised. They will have high expectations and don't want to waste time. You need to keep up β they will move onto another target if you don't look prepared. And these kinds of buyers are rare so you don't want to screw it up...
So be prepared before you engage, and make sure your DD prep is 10/10. More on that coming soon.
They are savvy and well-advised. You will need good advisors (legal, M&A advisory and accounting) who can match their expertise so you are not under-powered in the negotiations.
Occasionals
π Strategy
They've done some deals in the past, but not many.
M&A is not a well-defined and proactive strategy for them β they are opportunistic and will do deals when the timing is right and their strategy calls for them to make an acquisition.
So if you happen to fit the mould at the right time, they could be tempted to buy you.
π€ Engagement
They won't usually be actively seeking opportunities to buy companies. But they can be receptive and open to engagement if you present then with a good M&A prospect at the right time.
They are unlikely to have a dedicated internal M&A team. Usually that will sit under the CFO's remit, or perhaps directly with the CEO.
As M&A is not so ingrained in their strategy, they might need more time to get to know you before pulling the trigger. So you will want to more patiently build relationships with some of the key people there.
βοΈ Deal Style
They tend to move more cautiously than Serial Acquirers. They have less expertise and will work to figure you out more slowly.
There will be less internal resource than Serial Acquirers, so progressing the deal will be a 'side project' for an exec. That means things might move more slowly.
The Board might also need more convincing to proceed that their strategy can't be achieved organically (without an acquisition). And they will need more time to get advisors in place.
So overall, expect a slower and more tentative pace.
π° Valuation
Their examples of recent deals and their multiples might be a little old and outdated, or the examples less relevant to your business.
You might need to spend longer educating and convincing them about current multiples in the negotiations. Good advisers can help with this.
π Post Sale
They are unlikely to have a set process for post-acquisition integration. So it will vary on a case by case basis β you should be prepared for anything.
π Benefits
It's great that they have done some deals before, and you're not their first. That puts them ahead of the First Timers (see below).
They are also less savvy than the Serial Acquirers, who might overwhelm you with their deal experience. You might find negotiations a little easier.
π Risks
You will need to do more work to convince them to engage, and to get the approvals for the deal to proceed. It might be a little stop-start, and they might get spooked or distracted through the diligence. But they've done this before and that will help to grease the wheels.
β Tips
Your strategy should be half way between the Serial Acquirers and First Timers (see below). Get prepared and be well-advised, but add some extra patience.
First Timers
π Strategy
These are the M&A virgins. They've never done a deal before, so you would be their first.
This could be because they are actively adverse and sceptical of acquisitions.
Sometimes that's just the personal view of the CEO, who is setting that agenda internally. Or perhaps they are more neutral β theyβve just not needed to buy anyone as their business has grown well organically.
Sadly, this is the majority of the companies out there. Remember - M&A is always Plan B.
π€ Engagement
This is the hardest group of buyers to engage with. If they are actively sceptical, they might reject your approach outright before even getting to know you.
If you think they could be a good fit for you, you might still want to make the effort to get to know them.
Take the advice from engaging with Occasionals one step further. Patiently build relationships with key execs. Give yourself plenty of time to earn their trust and help them to get to know you and your business. They need plenty of handholding so you can't rush it.
Of course, they won't have specialist M&A expertise in house. So connect with the business unit leaders that best match with your business and other execs and network your way around the business from there.
βοΈ Deal Style
With First Timers, you have the highest chance that the deal dies.
They are easily spooked. Perhaps there's a minor issue in the due diligence that an experienced buyer would know how to resolve. They might walk away. Or they might get lost in the DD looking in the wrong areas.
Another risk is that you get a business unit leader motivated to buy... but they can't get the senior team on board to commit the time and money to progress the deal. That's where the engrained scepticism might hurt you. That might cause long delays in the deal, or kill it entirely. You might have wasted a bunch of time relationship-building for nothing.
Expect them to be slow to respond. They don't have a dedicated team for M&A so this is a side project for execs, without a known process for evaluating and progressing deals. You will have to own the timeline and push them through the phases... without pushing them too quickly so they get spooked. It's a fine balance!
Finally, deal structures can get unnecessarily complex with First Timers. Those who've been around the block know the value of simplicity. Inexperienced buyers tend to get seduced by fancy structures pitched to them by advisors, and you get tied up in knots. You will need to fight to keep things simple.
π° Valuation
This can be a real challenge.
If they've never done deals before, their expectations on valuation may be a million miles away from yours. Your numbers may be so far apart that a deal is impossible. They donβt know whatβs normal, and donβt have access to recent benchmarks.
You will want to get alignment on price as early as possible. But you need to be patient and build trust with them before pushing the conversation on price. Another fine balance of judgement.
π Post Sale
You should expect to have a lot of hands on involvement from them after the sale. Doing their first acquisition will feel like a big deal, and they will want it to be seen as a success.
So if you're planning on staying on post sale, especially with an earn out component to the deal, bear this in mind.
π Benefits
They're the least experienced and savvy of all the buyers, so you stand a good chance of 'winning' in the negotiations.
π Risks
The deal has the highest chance of dying or being delayed. There's a strong risk of wasting time pursuing a virgin buyer that will never go through with a deal.
β Tips
Be patient. Take the time for them to get to know you. Expect some hiccups and delays, and work with them to overcome these issues together. It might all be worth it in the end!
Financial
π Strategy
Private equity is the most common type of financial buyer. Their business model is to raise funding to buy companies, help the companies to grow and then sell them on for a profit to return to their investors. Like house flippers, for businesses.
It's now increasingly common for financial buyers to have a Buy & Hold strategy, building conglomerates of businesses with the intention of holding them for the longer term. Warren Buffet's Berkshire Hathaway made this popular, and Constellation Software and Tiny Co have followed suit.
In both cases, they will have themes to the companies they acquire. This could a combination of:
- An industry, like healthcare, software or recruitment
- A geographic region or particular country
- A life-stage or situation, like growth or turnaround
- Size parameters, such as an EBITDA range
For example, you might find a private equity fund that focuses only on buying European healthcare tech businesses with Β£10-20m EBITDA.
Some will be even more specific, looking to buy up and consolidate very similar businesses in a narrow niche to merge them together into a single entity. This is called a roll-up.
π€ Engagement
Their whole business is finding good investment opportunities, so they are always on the look out. So they are likely to reach out to you proactively.
They are also receptive to contact from you, if you fit well into their investment thesis.
Like the Serial Acquirers, they will have small armies of junior associates who are responsive for sourcing deals and building and nurturing relationships with potential targets.
βοΈ Deal Style
They obviously see a lot of deals, and have a very clear idea of what they want.
They want to evaluate you as quickly and efficiently as possible, so move quickly if they give you the green light to start a conversation. You will need to be well prepared. They don't like companies that are disorganised or waste their time β they will just move onto the next target on their list.
Like the Serial Acquirers, they will want to own the process and the timeline and to move quickly through due diligence by focusing on certain issues. So again, be prepared.
Finally, a word on structure. Private equity is famous for using complex deal structures, often with lots of debt and post-sale incentive structures, to manage their risk and boost their returns.
This is par for the course with them, and can be difficult to push back on. Make sure you get specialist advisors who understand these structures and can help you navigate through the complexity.
π° Valuation
They are very price savvy. There is no 'strategic premium', and no synergies. They won't pay a high price because they are desperate to hit their strategy. And they know that if they over-pay it's much harder to deliver a return to their shareholders when they flip.
The risk is that if you hold out for high price, they will just move onto another company within their theme that's available for a lower price. It's much harder to show them that you're a unique asset worth paying a premium for.
Your best bet is to get into a competitive situation. Ideally with another private equity buyer β they are fiercely competitive amongst each other and you can use that to bid up the price.
π Post Sale
They don't have an existing business to merge you into (unless it's a roll up), so it's essential to them that management stay on post deal. So expect a firm condition being that the senior team stay on post deal.
You can expect a part of the price to be held back based on performance too. This is a standard private equity tactic.
They are also famous for being aggressive and uncompromising owners. They have a short timeline to grow the business, pay off the debt used to finance the deal, and sell you for a profit. So they will be actively involved in the business.
π Benefits
They are experienced buyers, with a high chance of closing the deal if you fit their theme.
They are professionals, who will move quickly and won't waste your time.
π Risks
There are a lot of downsides of financial buyers.
Expect hard negotiations on price, with experts who know how to get good deals from founders. Some of the payment to be withheld, you will have complex structures and high involvement post deal.
β Tips
You will need good advisors (legal, M&A advisory and accounting) with specific expertise in dealing with financial buyers. They can support you through the process and make sure you are not under-powered in the negotiations.
Be organised β they will have high expectations and don't want to waste time. You need to keep up. They can move onto another target if you don't look prepared.
Summary
When you're starting to engage with buyers, consider what persona they fit into and use that to prepare yourself for how to engage and for how the deal will unfold.