In an earlier article published on this site, we quoted management guru Peter Drucker who said, “The buyer rarely buys what the seller thinks he’s selling.”
This quote accurately sums up the difficulty you may have trying to find a buyer for your business via your own efforts. You are too close to your company – and if you are like most business owners, you know all too well what your company needs to improve. Because of this, most middle-market entrepreneurs under-sell their company’s core capabilities and spend too much time focusing on their weaknesses when approaching the market.
In so doing, business owners neglect the most important step in the entire process: discerning what strengths buyers are going to focus on when they look at the company. Because of this, I highly recommend that business owners obtain professional deal making advice rather than try to sell their businesses on their own. Not only will you need guidance on the intricacies of the process, professionals are objective and can help you determine which features of your company need to be highlighted when approaching specific buyers.
As we have indicated before, quite a few experts are calling the current M&A environment a “seller’s market.” This is usually what happens when M&A activity begins to recover as it did in the middle of last year. Although all buyer types are active in today’s market, corporate acquirers are much more aggressive now than we have seen in years. There are several reasons for this.
First, there is a significant amount of cash on corporate balance sheets right now. Earlier this year the Federal Reserve estimated it to be as high at $1.9 trillion. That is a significant amount of capital. The quandary for CFOs and CEOs is what to do with these funds? In an earlier article on this topic, we examined the options available to corporate executives. Of all of them, acquiring synergistic companies is the most attractive use of the funds and the option generating the greatest long-term returns. And in this market, corporate acquirers are returning to the basics in their . Historically when corporate acquirers become most active they are acquiring companies for four fundamental reasons:
- To Gain New Sources of Revenue – This is playing a key role in the motivations of corporate acquirers right now. Quite simply, if economic growth is anemic at best – like it is right now – organic growth is weak as well. The fastest way to grow revenue is via acquisitions.
- To Improve Profitability – Acquisitions typically create synergies in back-office . Reduction in overhead via the consolidation of HR, , , etc. can significantly improve the acquirer’s bottom line.
- To Eliminate Competition and Gain Market Share – The new normal in the business world is that competition is tougher than ever. Companies are competing for a smaller pool of clients and customers now as compared to three to four years ago. Gaining market share and eliminating competitors is a key benefit of a well-planned synergistic acquisition.
- To Enhance Business Stability – Corporate strategics realized years ago that acquiring synergistic companies also provides them with enhanced ongoing business stability. For example, acquiring a company with a complimentary product line allows the acquirer to diversify into a larger market. Likewise, acquiring a company with suppliers that are not currently used by the acquiring company provides a further level of stabilization.
Sometimes I think the experts overanalyze completed deals to come up with an ever-growing list of why they close. Sometimes the driving forces behind a deal are the same driving forces that have been closing deals for decades. The four listed above are good examples of the primary factors behind why deals close.
As we have discussed before, there are dozens of “serial acquirers.” These are corporate players who year-after-year make acquisitions based on one or all of the above mentioned leading factors. They are constantly looking at their business models and seeking improvement in revenue, profits, market share, ongoing business stability, and diversification. As data has shown, corporate acquirers have been very active thus far in 2011 and it is a safe hunch that this will continue through the end of the year. And these fundamental reasons for deals closing will be driving the market for the foreseeable future.
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