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Punching Out: How to Choose the Right Buyer

Choosing the right buyer is more difficult than you might think. It would be easy to say that a seller should just choose the deal with the highest offer, but there are many other considerations.

Usually, a seller initially signs one Letter of Intent (LOI) that includes an exclusivity period of 60 to 90 days. That’s typically enough time for the buyer to complete due diligence and to negotiate the purchase and other agreements. However, due diligence and negotiations can take much longer, especially if something comes up or the business and/or markets change.

If a seller runs a competitive bidding process with an M&A advisor, there will be several offers to select from. However, it is often like comparing apples to oranges to pineapples to whitewall tires. You can usually throw out the lower offers, but choosing between the top offers can be difficult. Here are some other factors to consider:

Best Terms
The highest offers do not always come with the best terms. Very few offers are 100% cash, as there is almost always at least some level of escrow included in the offers. Sellers should decide early in the process (along with advice from wealth and tax advisors) whether they are willing to accept earnouts or rollover equity (equity in the buying entity) as part of the deal. Most sellers who are retiring prefer cash, whereas younger sellers, especially those who will remain in the business for years, often want to retain more equity to potentially reap more profits in the future. Public companies often use their stock to acquire companies, which saves the buyer from using cash/debt and can have tax advantages for the sellers.

When considering whether to take stock, rollover equity, earnouts, or other forms of deferred payment, it is important to review the strength of the buyer and the potential for a big payout (or conversely, no payout) down the road. Taking equity is a strong symbol from the seller that they believe in both their company and the buyer, but many factors will be out of the seller’s control.

Surety of Closing
At the LOI stage, the seller is granting the buyer exclusivity for a period. The seller will spend a lot of time and money on due diligence and purchase agreement negotiations. If the buyer falls apart, then the seller has wasted a lot of time and money, and the other buyers who were so eager a few weeks before may have moved on or worry that there is something wrong with the seller’s company. You should consider:

• Does the buyer have money?
• Does the buyer understand the business?
• Does it make strategic sense?
• Is the buyer’s business doing well?
• Have all the buyer’s decision makers approved of the deal?
• Does the buyer have experience closing and integrating deals?
• Even if the deal is 100% cash at closing, the seller must consider the strategic fit and experience of the buyer.

Ease of Negotiations
Does the buyer seem like they will be difficult to negotiate with? For example, did they make a lot of changes to the NDA or heavily negotiate the LOI? Sellers should never expect negotiations to be really easy, but if the buyer over-negotiates everything, it will take a lot of time, and legal fees will be costly.

The Buyer’s Reputation
What is the buyer’s reputation on previous deals? It is important to talk with the owners of several of the buyer’s previous acquisitions to see how the buyer acted during due diligence and after the deal closed.

Company Culture
Is the buyer’s culture a good fit, or will they keep the seller’s company separate in order to maintain the culture? Related to culture, will the buyer take good care of the seller’s employees, customers, and other stakeholders?

Closedown/Consolidation
Does the buyer plan to shut down the seller’s facility or move it? How will you feel about that, and will it play into your consideration?

Real Estate
For some deals, real estate can be as or even more important than the sale of the business. Does the seller want to sell the building at the same time or become a landlord and lease the building to the business buyer? Will the buyer do a sale leaseback? If the business owner also owns the real estate, it is important to consult real estate advisors and get an appraisal. Especially in the PCB industry, where permitting can be difficult and environmental issues are a concern, real estate can be a major issue in the sale process.

Post-Closing Work/Consulting
Many sellers will work with the buyer during a transition period after closing. Some will even work for years, either to help grow their rollover equity/earn their earnout or because they enjoy the industry. A seller should think about whether they really want to show up on Mondays after getting a big payout. Perhaps, with a plentiful bank account and the pressure off, and they can enjoy solving issues for customers. Money is not everything, so consider the working environment if a seller will stay more than a few months after closing.

Selecting the right buyer can be a difficult decision. Before you sell, really think about what’s important for you. Particularly when there are multiple owners or partners, it is critical to obtain some level of consensus prior to going to market. In the end, the seller may choose the buyer with the richest offer, but you just may be doing yourself a favor by putting a little more thought into it.

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. GP Ventures has offices in Chicago and Tokyo and has completed over 10 deals in both the PCB and EMS sectors. Tom Kastner is a registered representative of and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.