When Selling Out is a Good Thing | Kratos Capital

In the M&A world, several hundred transactions occur every week. Multi-billion dollar cross-border transactions garner the most attention, but the majority of deals are actually much smaller. Mergers, acquisitions, management buyouts, recapitalizations, and leveraged buyouts often involve companies with values between two and a few hundred million dollars.

These company owners sell for many reasons. One common theme, however, is that the most successful owners tend to sell. Understanding the process through the eyes of a seller can help investors considering an acquisition. An M&A advisory firm such as Kratos Capital can help you further understand the motivations of the seller in your specific transaction. And with this knowledge comes the power to negotiate the best possible deal.

Why Owners Sell
Owners seeking an exit may be tired of running the business, and seek a full or partial exit. Those seeking a full sale typically offer a lower acquisition price. This is because of the myriad challenges of running a business without the assistance of the owner.

In a recapitalization, the owner retains a minority stake in the business. This is a more common structure that gives the owner an incentive to continue growing the business. The owner still gets more free time, but also can financially benefit from the sale and from business growth.

Exiting owners often have significant portions of their net worth tied up in the business, and therefore hope to gain some liquidity. Another common motive occurs when an aging owner experiences health problems or can no longer effectively run the business. This can necessitate a quick sale, resulting in a lower price.

Buyer Motivations
In the world of acquisitions, private equity is one option, typically better equipped to assess the business, engage the owner, and move toward a speedy completion. Well-run middle market entities can often be acquired within three to six months. This is doubly true if exiting owners can easily provide monthly and yearly financial statements, and if the acquirer has a ready and able due diligence team.

In family businesses, disputes are common. A relative or spouse may abuse company assets, lowering company profits and morale. Incoming buyers can eliminate dysfunctional players and improve operations. Buyers seek acquisitions for many reasons, some of which include:

  • Financing an expansion.
  • Increasing market share.
  • Raising capital for another acquisition.
  • Putting better management in place.
  • Diversifying a highly focused customer base.
  • Improving product and service offerings.
  • Other Factors

The larger economy is often a significant motivating factor in a sale. In the current economy, there is a large pool of capital available. This has increased acquisition prices, encouraging many owners to capitalize on the seller’s market and put their businesses up for sale. Many owners work with advisors so they can sell their businesses for higher multiples. With large volumes of cash competing in the marketplace, acquirers, particularly private equity firms, are increasingly flexible with the way they structure deals.

It’s important, however, to note that even in a seller’s market, owners can get carried away. Expecting too much—particularly if you are not well-prepared for due diligence—can destroy the deal, losing owners millions of dollars.

About Kratos Capital
Trying to manage a transaction on your own is a fool’s errand. The expertise of an advisory firm can help you better understand the other side’s motivation, and then challenge this knowledge into the best possible deal. As you navigate the process, partner with an M&A advisory team that boasts expertise in your industry. Kratos Capital can help.