An Alternative to an M&A Auction for Small Businesses
Not only is a merger and acquisition (M&A) auction a bad idea for some companies seeking to sell, it often doesn’t work. In fact, unlike selling a stock at any price, in M&A you can throw a party only to find that nobody shows up.
This is particularly true for growth and middle market companies with emerging brands and client bases.
However, there is an alternative technique that we’ve used successfully in special situations over the years, especially when selling to a large strategic buyer or major customer.
Here’s the scenario in which this approach is ideal.
You are a small or growth company and you want or need to sell for all the right reasons. It could be anything from wishing to retire to needing a larger platform in order to win bigger customers. You may know potential buyers, but you don’t know how to approach them without appearing to be in financial trouble or desperate for an exit.
Your buyers have the mentality of large-company corporate development departments. They are willing and built to receive large acquisition opportunities from Goldman Sachs and the rest of Wall Street; they simply can’t pass up a competitor for sale or chance to fill a hole in their product line.
In this scenario we’re talking only about large opportunities, because the acquisition has to move the revenue needle for the acquiring company in order to influence its stock price or create a significant increase in its valuation.
In other words, big companies are not sitting around waiting to receive Confidential Information Memorandums (CIMs) from growth or small revenue companies – no matter how important or revolutionary you believe your company will eventually be to them.
In fact, they get dozens of inquiries each month and the reality is that you’ll never get to first base because your revenues are too small or your banker’s presentation is not compelling to them.
They also know small deals take as much work to close as large deals and, therefore, are not worth their time.
Even if you have a strong relationship with the large company at a product level, supply a component or point solution, or are a key sub-contractor on a major project, Corporate Development doesn’t know you. The CFO who signs the checks doesn’t know you. And the CEO who has promised the board a large acquisition, is not going to risk political capital on an unknown.
Large corporations are not fools. They’re always available for opportunities that will advance their mission and revenues. But they cannot give equal weight to all opportunities, and they certainly do not respond to an auction for a small company.
More instructive is looking at how companies like Microsoft and Salesforce have acquired small companies over the years.
These large players put small companies in their preferred provider system (partner programs) and watch them.
If revenues grow and product connections are inevitable, it becomes better to own the smaller company than outsource the function.
While investment bankers are trained to sell auctions to their future clients, and while we are exceptionally good at facilitating them, even a modified auction (one in which we’re highly selective about who we approach) can be a bad choice for a small company that already knows who should buy it.
Execution: How to Approach a Large Strategic Buyer or Major Customer
The key to selling to a large strategic buyer or major customer is simple: Start early and don’t be for sale!
Go to your targeted potential buyers with an investment proposal or request to participate in a joint development project. Ask your operating executive and/or corporate development contact for an investment in your company in exchange for a minority equity stake. This is particularly useful if you don’t need the money.
If you’re concerned about appearing weak, then the investment should be for something tangible like dedicated product development, company-specific R&D, or new business development.
An immediate advantage of this approach is that you become non-threatening. You are not asking a large company to make an M&A decision in a tight auction timeframe (which, again, is something they overwhelmingly will not do for a small company). Rather, you’re flipping the script and asking for their assistance.
Humans prefer helping over having to make a binary “buy now or miss your chance” decision.
Under these alternative circumstances, they will read your CIM. They will consult with operating leaders at the group or division level. They will take their time and consider the real possibilities of your current and future work together.
Summary
Large companies don’t invest in small companies. they buy them. They do this because they need to be a majority owner to record revenues. While some large organizations do have dedicated venture capital units, this is far less common than it’s been in the past.
So, if you can go to your targeted prospective buyer or buyers with a non-threatening proposal, you avoid a do-or-die decision and can take your time building the relationship beyond the product or division level – and relationships are what get deals done, especially for growth companies.
To take the alternative approach to an M&A auction, you’ll need your investment banking firm to develop compelling presentation materials, make that initial soft approach to the buyer, and construct deal terms and a valuation. After all, you might beat the odds and get that initial investment which then becomes a pathway to an acquisition. A “soft” approach or a non-auction approach may not yield immediate results. But it can get you high-level recognition and give you and your targeted acquirer a roadmap to an eventual transaction.
