Owners Who Passively Wait for Offers Sell for Less – The Role of Marketing in Private Company M&A

It’s a fact that all business owners eventually leave their business – hopefully, vertically – and hopefully profitably from the benefits of a pre-planned exit properly conducted through a merger & acquisition process (or, for a very few, an Initial Public Offering).  That assumes an owner wants to maximize his or her ROI on the investment of money and time in the business, as opposed to passing along the business to children or employees, or other means of exiting without a profit maximization goal.

Regardless of goal, as the graphic indicates, the longer one waits without actively planning, the fewer the options, and correspondingly, the less likely that the outcome will be as profitable to the seller as if it were planned and professionally managed.

While there are numerous M&A process elements to manage, this article focuses on the deal marketing process exclusively.

Simplistically, shareholders can take one of two approaches: awaiting – hoping for – an offer from someone who calls or makes a comment at a trade show (reactive approach) or establishing a plan with supporting actions to position, then market, the business for its highest potential sale value (pro-active approach, focused on achieving a high ROI on all those years of monetary and time investment to build the business).

In a Successful Sale, the Company Is Sold, Not Bought

When the goal is to optimize value for the seller, this adage applies (again, pro-active, not reactive).  Either the company is available or it is not.  Passively waiting for buyers to approach is a formula for selling at a lower price and less favorable deal terms.  If you are open to receiving offers, hire a professional advisor and do it properly from the start – you’ll come out far wealthier in the long run.

If you are reactive to an unexpected inquiry, you probably will not be prepared to respond in a way that shows your company at its best, and you’ll certainly not be positioned to reap the gain of a competitive sale process.

Clearly, the reactive option will almost invariably lead to a lower ROI on the ultimate transaction.

Marketing Process

In my earlier career, I worked in both mass and precisely targeted direct marketing.  The last mass market advertiser on whose account I worked spent $250 million per year on TV, radio and print publication ads to reach a broad target market defined as adults, age 18-49.  That approach is the exact opposite of how M&A and capital raising deals are typically managed, because the target buyer or investor is defined precisely by the projected fit with their objectives.

So, it is direct marketing that does the heavy lifting.  Direct marketing does not cast a wide net, but rather targets narrowly defined company groups and individuals.  A direct sales effort follows to determine whether the target can be interested in reviewing the proposition.

The quest to align the objectives of both parties is analogous to matching a large quantity of unlabeled locks and keys; it is a process that requires plenty of judgement and analysis to hypothesize best fit, but also may require a lot of trial and error.

The Offer, The Message and The List

Direct marketing practitioners cite basic elements that determine the outcome of any campaign: the offer, the message content and context, and the list — what is being offered, how it’s being communicated, and to whom.  Each element must be complementary to the other.  The M&A and capital raising process is analogous.  A company’s investment banker presents the proposition to a targeted audience, then closes in to sell the concept to a selected sub-set.

Transaction Structure (the offer)

• May be a very specific offer, such as these examples: “$3.00 per common share,” or “Seeking a $20 million C Round,” or “Available for Sale, Owners Intend to Retire” or “Available for Recapitalization to Support Owners’ Growth Goals”
• Or may be more general if the optimal path is less certain, such as: “Exploring Strategic Alternatives, Including Corporate or Private Equity Investment, or M&A Transaction”
• The offer may even vary by target audience

Content and Context (the message)

• Align marketing materials to the audience
• Present “teaser” materials initially, until successive levels of information sharing can be accomplished under a “Confidentiality Agreement (CA),” also called a “Non-Disclosure Agreement (NDA)”
• Employ tactics to effectively communicate your company’s value to the targeted prospect list – for example, short videos are compelling
• Be expository on the opportunity, candid about the risk
• Tailor messaging with the expectation that sophisticated strategic acquirers will seek:
  • Strategic fit
  • Projected internal rate of return (IRR) on the acquisition/investment to exceed their cost of capital
  • Expect a return on invested capital (ROIC) in three to five years (one definition of ROIC is Adjusted Net Operating Profit After Tax/Average Invested Capital)
  • Especially if publicly traded, they will expect that the earnings generated by the acquisition/investment will be accretive to their earnings after a certain point (i.e. more than covering its cost)
• Private equity and venture capital investors will seek similar criteria to strategic investors, but their cost of capital will be different, as will be their hurdle rates for defining success and deal selection process

Targets Universe (the list)

• Developed through analysis of parties for whom the investment or acquisition would be most beneficial.  This may include Strategic and/or Financial Investors.
• Utilizes limited-access subscriber databases used by active investors and acquirers, with permission-based, staged exposure under non-disclosure agreement
• Will involve direct phone calls and emails to targets
• May be different lists, defined by unique criteria, such as “Domestic U.S. public companies with compelling need to acquire System On a Chip (SoC) for mobile computing engineering expertise,” or more generically such as “Private equity investors in value added distribution logistics companies”

With the goal of driving the transaction to achieve the highest valuation, software-assisted, data-driven marketing and communication process management builds the likelihood of a successful outcome.

Professionalism is built on a foundation of processes.

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If you found this article relevant, you may want to read “Be Wary of the Guy Who Says He Wants to Buy Your Company (Part 1).”

McGavock Dickinson (Dick) Bransford is a Managing Director in San Francisco with Mid-Market Securities, LLC, an investment bank headquartered at 11 East 44th Street, 19th Floor, New York, New York 10017. Member FINRA/SIPC.  He can be contacted at (415) 294-0002 or mdb @ mid-marketsecurities.com.

Disclaimer: This article provides general information, and is not intended to constitute, and should not be construed as, legal, tax, accounting or business advice, nor does it constitute an offer to sell or to purchase securities. Rather, it is summary compilation of timely issues confronting your industry and as such does not purport to be a full recitation of the matters presented.  Prior to acting upon any information set forth in this article or related to this article, you should consult independent counsel and/or more detail contained in the Source Information. The article reflects the opinion of the writer, and does not necessarily reflect the opinions of Mid-Market Securities, LLC, or its affiliates.  IRS Circular 230 Disclosure: In order to comply with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax discussion contained in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.