The Three Components to Buy Side Work

Trying to buy a company is one of the most difficult things to do in business. So don’t bother. Go away. If you’re still reading this, sigh. Here goes.

Why is buy side work so difficult? In the world of M&A, buyers far outnumber sellers. This truth runs contrary to conventional wisdom that says buying is easier than selling. For most products, sellers are plentiful, buyers are difficult to find, but because M&A involves the sale of a completely-unique-the-only-one-in existence-cannot-be-duplicated-to-meet-demand product, the normal sales roles are reversed: A company for sale is the limited resource whereas buyers are plentiful. In a bidding process, coming in second is the same as a last place finish. So, what can an acquisitive company do to successfully buy companies?

Buy side work can be divided into three components: 1) search, 2) negotiate, and 3) finance. In reverse order, the “finance” component is usually the easiest. Profitable companies of size often will have sufficient cash or credit to affect transactions. And for those companies (or individuals) who lack funds, they can often use the acquired company as collateral. The “negotiate” component is, in my opinion, the fun part. That leaves us with the most difficult component of buy side work, “search,” which, ironically, typically gets short shrift.

Buyers cannot negotiate or finance a deal unless they have something to buy, but as anyone who has attempted to buy a company knows, the search part of M&A is a terrible, awful job. No one wants to do it. Why? Because the seeker will be contacting a cohort – business owners – who are incessantly contacted by would-be buyers. That’s why private equity firms often task the newest and youngest associates with the role. “Congrats on getting a fancy MBA and getting a job with a big PE firm…now, start calling people who don’t want to speak to you.”

Acquisition-minded executives soon learn that while they are ostensibly buyers, they are actually sellers. What buyers offer in exchange is the most fungible of all commodities: money. The amounts of money and the terms attached might differ, but a dollar from buyer A is the same as a dollar from buyer B. Therefore, buyers are selling something else: themselves. The buyer must sell reasons why a seller should condescend to join the buyer’s company. The buyer must sell their ideas and notions and rationale to the seller.

Avoid the “passive ask,” that is to say, passively asking others to find that perfect company. I see this whenever I get a detailed list from a buyer. The buyer is essentially saying, “when you find the perfect company for me, contact me!” The odds are low that someone else will do that job for the buyer. Instead, buyers should be proactive. Do research and put together a short list of companies that might be of interest.

Once a list is compiled, the real fun starts:  Making contact. Phone and email are unlikely to find traction, so send a letter. People get so little mail these days that it tends to be opened by the intended recipient. Being blunt and directly stating a desire to acquire a company might work, but what can pay more dividends is if the buyer has a thesis, something other than, “We have money and we want to buy your company.”

A thesis is what the buyer does for the seller. Too many buyers have an insular approach, they only think about what the acquisition will do for themselves. The money offered is a commodity. It isn’t unique, unless the buyer wants to grossly overpay, and even then, an extremely high valuation might not be enough. A thesis needs to be something different, something that might be of interest to a business owner.

Buyers should think of a pain point in their industry, devise a possible solution, and ask the recipient for feedback. “You’re an expert in this field; I’d like to hear your thoughts.” Offer to buy lunch to discuss the thesis, or better yet, offer something of substantial value/interest. If the buyer has a membership at a tony golf club, invite the owner to play golf as a guest.

Avoid the following comments. Every buyer seems to think these are unique comments. They’re not. Everyone says them:

• “We’re looking for a family run business without a succession plan.”
• “We’re a long-term holder”
• “We have money and industry experience”

Lastly, buyers should never say they are looking for a “motivated seller.” That sends the wrong signal. Motivated seller = low valuation.

Understanding the three components of buy side work, especially the most important and most ignored, “search,” can help a company transform the strategy of, “lets make acquisitions” into specific tactics that improve the odds of success. If the assistance of an investment bank is sought, understanding the role the banker is to play will also improve the odds of success. Most buy side bankers can do all three components, but if only one is required, then that role should be clearly elucidated. At a minimum, I recommend hiring a banker to do the search and negotiate components.

Buy side work has a 4^th component, and this might be the most important one. “Integrate.” I’ll provide some thoughts about that in a future article.