How to read the minds of prospective buyers for a business

19 July 2024 Consultancy.uk

Finding the right organisation to purchase a company at the best return for stakeholders and staff alike is difficult. Clive Stanley, a director with of Warwickshire-based M&A consultancy Acqius, explains the clues businesses can pick up on to try to get the best outcome from any sale.

Meeting and negotiating with prospective buyers requires an ability to pick up on hints to their intentions from every move, comment and signal they make. But I co-founded M&A consultancy Acqius after decades of creating, leading and selling manufacturing companies worth up to £30 million. My fellow director Rob Whorrod and I have picked up numerous ways of working out possible buyers’ intentions, saving ourselves time, money and effort.

When you put your business on the market, all sorts of people will claim they might want to buy it.

How to read the minds of prospective buyers for a business

Competitors and other firms in your sector will tell you they want to come to your premises, to see what’s on offer. Many just want to take notes on how your processes work and pick up ideas – even if they’ve signed an NDA. If they bring process staff, such as engineers, rather than financial teams be very wary of them. Consider limiting who can come to the likes of CFOs and accountants.

Private equity firms you approach are often quite straightforward, telling you early on whether your business is a good fit for them. Others may lead you on. If they say something like “your firm falls outside our remit, a bit, but we’d like to have a look at it”, they may well be wasting your time, simply keeping lots of options open about where they can spend the millions of pounds they need to invest. You can pick up how keen they really are by their demeanour, how quicky they respond to telephone calls and whether they get back to your request for a team meeting in minutes or days. If they take their time, their heads are probably elsewhere.

Financial due diligence is the biggest indication of intent. If a private equity or financial director hands you an Excel spreadsheet with 200 questions on it, or is ripping through your accounts and seeing where savings can be made, they are probably interested. If they take a more laid-back look at your books, they probably aren’t.

If someone talks a lot about the potential problems of buying and integrating your firm into their own, don’t take that as a lack of enthusiasm. It might be that they are so sincere about wanting it that they need to be sure, early on, how an acquiring process might unfold.

If you suspect someone is wasting your time, tell them you’ve got serious interest from another party so they need to act now – even if it’s just an expression of interest letter.

Striking a deal for your business values

Many company owners want to do the right thing by their company and its staff, when they sell up, such as trying to safeguard jobs. A buyer who is open about their strategic goals for your operation is more likely to help fulfil these wishes. Private equity firms tend to want continuity – at least until they see some obvious cost savings that can be made. If someone is taking a positive interest in your company culture and staff retention, this is generally a good sign, too.

But be wary of a trade buyer who tells you they won’t change anything about your small factory in Coventry, say, when they’ve got a large factory running at 80% capacity in Birmingham. Indeed, any buyer can tell you they’ll keep your business largely as is, but if they feel the need for change down the line, they’ll make it.

If a potential acquirer tells you that it’ll be reasonably straightforward to merge your business with his, that’s a good indication that  you can push them on price. The less work it is for them to take over and absorb your company, the higher value it can have for them.

If someone says they are interested in a couple of parts of the business, but not keen on others, it doesn’t mean they are time wasters. Offer to sell them the whole business and buy bits back, perhaps. Or suggest that they sell sections on.

Getting the best price

Most business people are too shrewd to make it obvious that they are prepared to pay top dollar for your firm, so never be afraid to get into clear, firm negotiations.

One thing trade buyers will often do is say they are quite interested in your firm, that it “kind of fits” with their existing operations, but they can’t and won’t pay too much for it. When you try to force their hand and ask them to make an offer, they’ll reply “well, we might make an offer” and appear to be only vaguely engaged. Don’t be fooled. They are probably very, very interested – they just want to buy your organisation cheap. Don’t let them.

Always ask for proof of funding, close to the start of a buying process. If your business is worth £4 million and a supposed purchaser has only got £200,000 and needs to raise the rest, a sale at a good price probably isn’t going to happen. If they ask you what the outstanding debt is on your assets, they’re probably trying to work out how much they could refinance them for. An organisation that needs to borrow a lot of money to buy your firm, probably isn’t going to want to pay much for it. So, if you have other potential purchasers, it might be best to go with them.

Acqius offers a wide-range of sell-side and buy-side mergers and acquisition services for SMEs, entrepreneurs, start-ups and other firms. These include exit strategy planning, valuation advice, asset divestment and potential-acquisition searches.