Of the qualifications you seek in a buyer, one of the most important is Do they have the money? If the answer is No, but we can find it, this could be a danger signal.
As a seller of your privately held company, youll spend considerable resources getting an M&A transaction completed. Critical to a successful sale is to find a buyer with not only the right strategic fit, but also the wherewithal to execute a transaction. Most of the buyers we approach for our clients are public companies, with verifiable financial strength, and cash available to do all cash deals without borrowing. However, we often find privately held buyers that lack strong balance sheets and are reliant on third-party financing to do a deal.
This creates an additional level of risk, as the transaction now requires third-party approval, an additional level of due diligence and scrutiny of terms, and another chance for someone to nix your deal. Ask questions about the buyers funding sources. Have they raised money for deals before, and is additional investment already approved? How long will it take to gain approval, and what is the process? Further, what are the options if the primary funding falls through? And, how much experience does the investor/lender have with deals like yours in the technology space?
Do your own careful due diligence on the buyer. You may know little about their financial situation as they are not public and probably dont have detailed financials they are willing to share. Their business may not be mature, and their very survival dependent on securing funding and doing deals such as this one with you. Take care to understand the buyers longer range plans for the company. Are they positioning for an exit? Make sure their timeline is consistent with yours, especially if you are being asked to sign up for an earnout or an extended employment agreement.
Bottom line: smaller, under-funded, privately held buyers create an additional level of risk for you as a seller. Dont ignore this buyer group, as they may be your best option. But, go in with your eyes wide open.
A version of this article originally appeared in Soft•letter and Software Success.
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Of the qualifications you seek in a buyer, one of the most important is Do they have the money? If the answer is No, but we can find it, this could be a danger signal.