September 03, 2019

Understanding the Buyer and Service Provider Landscape

We review the main categories of knowledge economy buyers and their service providers.

Recent years have seen a proliferation of different buyers and service providers who earn their living through acquisition activity. Business owners and management teams are inundated with a range of marketing communications from these companies. So let’s first identify the types of M&A players; identify the needs you may have that cause you to consider engaging with one of them; and conclude with who to take a call from and who to ignore when inundated with people trying to sell to you. There are five main categories:

  • Strategic buyers;

  • Private equity;

  • Financial advisory firms;

  • Investment banking firms;

  • Other service providers.

Strategic buyers

Strategic (or corporate buyers) are non-private equity investors who have existing businesses which will typically make acquisitions that form part of their existing operations. Strategic buyers typically acquire to realize long-term strategic value by combining a knowledge economy acquisition with their existing operations.

At some stage, if not already, your firm is likely to be approached out of the blue by one of these buyers. Prolific strategic buyers will approach you in a professional way and these calls are typically always worth taking seriously. However, there are a number of do’s and don’ts in handling unsolicited acquisitive approaches, so we recommend reading our article on how to deal with them.

Private equity

Private equity (or financial buyers) invest private capital into  “portfolio companies”, which are typically held, grown organically and with “add-on acquisitions”,  and then exited after a hold-period. Private equity will typically look for specific traits in a knowledge economy acquisition and selling to a private equity buyer will have different implications as compared with selling to a trade buyer.

These are usually private equity firms looking for investment opportunities in your sector and will often solicit relationships via email or phone. They can be legitimate buyers but not likely to offer an attractive price and structure unless they are part of a competitive process run by a competent investment bank. Typically, they will be looking for firms in growth areas of the market and in excess of $2m EBITDA. Smaller than this, the approach is more likely to be from private, high net worth investors or as an add-on acquisition to a private equity’s existing portfolio company.

Financial advisory firms

These are mainly corporate finance firms and accountants who provide various services to small and medium sized businesses. The services they provide might support a sale transaction process but many won’t have deep expertise in running a full transaction process. While some firms in this category do transaction related work, their core service offerings relate to financing and other creative deal structures rather than competitive sale auctions to drive maximum value. For example, an accounting firm might assist with responding to buyer diligence requests as part of a sale, while an investment bank manages the bidding and negotiating process with the various buyers.

Investment banking firms

These are M&A professionals, ranging from bulge bracket Wall Street firms to specialist boutiques. In this piece of the M&A advisory market there are horizontal generalists and highly specialized experts in a particular sector or niche, narrow in focus and deep in expertise. Equiteq would be classified as an investment banking boutique, narrow and deep in the knowledge economy sector.

Investment banks typically target a certain size of client, usually above $1m EBITDA and are not usually interested in micro-businesses. A good one will be expert at the process of selling a business in a way that generates a higher price, with a good deal structure to match shareholder needs, and move the business into a new home that is right for both seller and buyer. This is an art and their job is to generate competition among a group of relevant potential buyers to maximize value, then work between seller and buyer on synergy value and structure a deal.

Other service providers

There are other providers on the periphery of M&A but rarely lead a transaction. For example lawyers who get involved in issues discovered during a transaction and the forming of the legal documentation that the buying and selling parties need to sign. Accountants mentioned above would also feature here because they provide taxation efficiency services in a deal to legal services providers or others like insurance brokers. They see transactions as an entry point to sell their services, potentially to a new owner, so may use M&A as a route in to sell their core services, but they are not (usually) able to provide the services necessary to lead and close a transaction.

Key takeaway points

  • Good strategic deals develop from relationships you make in the normal course of doing business.

  • Unsolicited, generic letters, emails and phone calls are mostly just distracting noise. If a communication feels generic, it is, don’t waste time on it!

  • Build your advisory team early. Find advisors that you trust before you need them so you don’t get over your head with no trusted help.