As an owner, you may have established your goals and readied yourself emotionally for sale. But how well do you know the buyers you’re interested in? Not in terms of the company’s position in the industry or its wherewithal as a financial buyer – you may know the company very well. Rather, how well do you know the company as a potential purchaser of your business?
Here are some of the top types of buyers to avoid in collection agency M&A:
The “Blabbermouth” Buyer
You’ve worked a long time to build your business. As discussed in a previous blog, linked here, you want to sell it but you’re concerned that word would get out to your clients, staff, or competitors before you close the deal. For a service business especially, a “loose cannon” can be detrimental to a sale. Executing a confidentiality agreement will only provide you with so much protection. Some financial buyers are notorious blabbermouths. They unscrupulously tap into their network to find out about your company, and, before long, word is out about your company being for sale. Be wary of the blabbermouth buyer.
The “Buzz-Saw” Buyer
Some industry buyers will tell you their intentions are to keep your business intact and not integrate into their larger operation. To you this means that your staff is safe from losing their jobs. Other buyers intend to cut costs immediately after a closing by removing duplication between your business and theirs. In a service business, that starts with payroll. This may not sit well with you. After pricing, the most important deal consideration for most sellers, by a wide margin, is maintaining jobs of the employees who you hired, trained, and developed longstanding relationships over many years. Avoid the buzz-saw buyer if you want to maintain goodwill with your staff post sale.
The “Penniless” Buyer
Like other financial-type buyers, the penniless buyer (a.k.a. deal sponsor) looks and acts the part of a capable and qualified buyer. The biggest difference between an established fund buyer and a sponsor is equity. The fund buyer has it. The sponsor needs to raise both equity and debt to finance your transaction. Some sponsors are experienced in purchasing service businesses which are typically cashflow businesses with very little, if any, hard assets to leverage. Others are attracted to high profit margins but are not experienced. While they may have relationships with equity and/or debt providers, they may not be able to navigate the transaction to a successful outcome. Be sure to qualify the buyer that needs to secure both equity and debt financing.
The “Bait-and-Switch” Buyer
You know the game of bait-and-switch. In a sale of a business, a business buyer senses competition and offers the seller an artificially high price and/or attractive deal terms early in the selling process after receiving only limited information. The bait-and-switch buyer has no intention of ever purchasing the business at that level but is merely enticing the seller to focus on them exclusively instead of continuing discussions with additional buyers. This type of buyer will notoriously try to lowball the price after it effectively removes all of the other competitive buyers from the transaction process.
The experienced bait-and-switch buyer could be the hardest type of buyer to avoid. They typically have all the attractive elements that a seller is looking for in a buyer. For example, they have the financial ability to close the deal. By definition, they don’t have a business in the seller’s industry already so they should keep the seller’s staff in place. And bait-and-switch buyers will make you feel good. They have all the attractive elements of a buyer except one major one: they have no scruples. If you’re worried about bait-and-switch buyers, the solution most likely lies in hiring an experienced advisor who can more accurately gauge the scruples of a buyer candidate.
The “Tire-Kicker” Buyer
This buyer spans all types of buyer categories including industry, strategic (those from related industry), and financial. They want to see information on all deals in the market and always say “sure, send me the information and I will take a look.” The truth is, they never have any intention of buying a business unless they can do so on very favorable terms to them. Some of these tire-kicker buyers use opportunities to participate in transactions as a very cheap way to see competitors’ information. Like the bait-and-switch buyer, the tire-kicker buyer can be difficult to detect. Again, the best way to hedge against such buyers is by hiring an experienced advisor who can reliably judge a buyer’s intentions.
Selling a business can be incredibly difficult, especially if you don’t know which types of buyers to avoid. An experienced advisor knows the tricks of the trade and over the years has developed his/her own battle wounds by dealing with the buyer directly. Their experience can be the difference between success, partial success, and outright failure when it comes time to sell your business.
Fortunately, Kaulkin Ginsberg can help you navigate those choppy waters. We have worked with small, mid-sized, and large privately-owned companies, Fortune 500 corporations, and financial investment firms on their collection agency M&A strategies for thirty years. Whether you’re seeking professional sell-side representation, assistance forming a partnership or joint venture, a transaction assessment, or a valuation, Kaulkin Ginsberg will guide you through the process. For more information, or to schedule a confidential discussion of your business goals, contact us at firstname.lastname@example.org.