by Scott Bushkie, CBI, M&AMI

In today’s active marketplace, we’re hearing from more buyers than ever—companies looking to grow through acquisition, private equity firms and individuals looking to buy a business.

A buyer, regardless of size or sophistication, really has two options when looking to acquire a company; they can take a passive or proactive approach.

In a passive role, a buyer sits back and waits for opportunities to hit the open market. That means that when they see something that piques their interest, they’ll likely be competing against other buyers. If they’re the top bidder, they get the company. If not, they wait for the next opportunity.

In a proactive approach, the buyer hires an M&A firm that specializes in buy-side representation or has in-house resources. These professionals proactively seek out businesses that fit the buyer’s target niche and then approach the owners about a sale.

Of course there are upfront costs associated with the proactive approach. Typically, only private equity firms or companies with at least $100 million in revenues will carry the costs of a fulltime M&A team. Smaller, more occasional buyers will need to pay the retainers and success fees associated with hiring an M&A search firm.

One significant advantage of the proactive approach is that it really forces you to have a clear strategy. You tell the M&A firm specifically what you are looking for (or most times they help you develop that strategy) and then they go out and target it.

Another advantage is that a proactive acquisition approach will target passive sellers—people who haven’t listed their business on the open market. That creates an opportunity to enter into one-on-one negotiations. As a buyer, you won’t be competing with anyone else, and that could help you get a better price and deal structure.

Competition for businesses on the open market is heating up. For example, for the deals with at least $500,000 EBITDA or greater we’ve either closed or are negotiating in 2014, we’ve averaged more than six written indications of interest (IOIs) per business. (And that excludes the outlier which generated 26 IOIs.) In other words, passive buyers face a lot of competition.

And while the proactive approach requires upfront search fees, it can cost less in due diligence fees overall. That’s because there’s a greater likelihood of success when you enter into one-on-one negotiations versus bidding in the open market. I’ve seen buyers spend $50,000 to six figure sums on due diligence only to find out they didn’t win the deal in the end.

The crux of the issue: The passive approach requires less commitment up front. But when you hire an M&A search firm, you have a greater chance of getting a deal done and will likely spend less in the long run.

Scott Bushkie is Principal of Cornerstone Business Services, an M&A Advisory firm. To request a book with advice on the exit planning process, or to discuss other confidential options, contact Scott at (920) 436.9890 or [email protected].

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A thought-leader in the industry, Scott developed the Cornerstone Process to offer investment banking M&A-level services to the lower middle market. The result is a closing ratio that’s more than double the national average.