Qualifying the Buyer

As a seller of a tech company in an M&A, you want to deal with the right buyer, a buyer who has the financial and strategic fit as well as experience and motivation to ensure that you wind up with an optimal transaction. However, to verify that the buyer is indeed a good fit, you need to ask him or her some important qualifying questions.  After all, a prospective buyer will qualify you before they pursue a deal. You need to do the same ‒ it's a mutual process.

Here are some important questions you need to ask to qualify a buyer.

Why are you interested in my company?

Asking a buyer why they want to acquire or merge with your company is an important way to determine whether they have the right strategic fit and long-term commitment for your company. For instance, do they see the M&A as a way of expanding into new markets, gaining new products, or complementing their existing operations? Knowing why the buyer is interested in your company also gives you the opportunity to highlight how your business addresses the specific things the buyer is looking for. However, if the buyer doesn't have a clear vision or a vision that aligns with yours, it can indicate problems that might kill the deal or get in the way of a smooth integration after the deal is done. In fact, if a prospective buyer can’t give you a clear answer about why they’re interested in your company, it’s likely not a good fit. Continuing to deal with someone like that is probably a waste of your time and resources.

What acquisitions has your company done?

Knowing what acquisitions the buyer has previously made is another way of determining whether the buyer is a good strategic fit for your company.  For instance, knowing what companies the buyer has acquired can indicate the buyer's long term goals, giving you the opportunity to assess whether their long-term goals align with those of your company. It's also important to understand how the acquisition and integration process worked in those deals. If it’s agreeable to the buyer, talk to representatives of the acquired companies. Ask them if the M&A process ran smoothly or if there were significant issues that came up during the transaction. For example, did the buyer seem to go out of their way to uncover what seemed to be minor things during due diligence looking to lower  the offer that they originally made? Did the buyer say one thing during negotiations about how they would integrate products and personnel, but acted differently after the deal was closed?  Knowing that the M&A and integration processes went smoothly in those deals gives you confidence that your deal with the buyer will go smoothly too. However, knowing there were problems in past acquisitions can be cause for concern.

What is your preferred deal structure?

Knowing the buyer's preferred deal structure can be crucial in an M&A, especially if it differs from your preferred deal structure. For instance, if the buyer prefers a deal structure that includes a significant earnout but you prefer an all cash deal, those differences need to be resolved. Otherwise the deal won't work.  Or if the buyer prefers an asset sale but you prefer a stock sale, those differences also need to be resolved for the deal to proceed. In any case, it's vital that you understand the nuances of the preferred deal structure because they can result in unforeseen costs or tax liabilities that eat into your profit from the deal. For instance, the buyer might prefer an asset sale because it can offer tax benefits like a stepped-up basis, but if you agree to it, you might face double taxation or a higher capital gains tax depending on the entity type. A stock sale, by comparison, may be more tax-efficient for you, but less so for the buyer. Understanding the buyer's preferred deal structure and working out an agreement that is mutually beneficial will lead to a more favorable outcome. And once you agree to that deal structure, it’s important to document it in the purchase agreement. That documentation codifies the agreement, which prevents future disputes, protects against unexpected liabilities, and ensures the deal aligns with your and the buyer's legal, financial, and tax strategies.

What is your approval process?

Understanding the buyer's approval process is important because it helps you anticipate what things the buyer will focus on during the M&A process. Knowing what that focus is will help you prepare for it. For instance, by anticipating what things the buyer will specifically look for in due diligence, you can proactively address any potential issues in those areas. In general, understanding the buyer's approval process allows you to prepare your own business and data accordingly, which helps mitigate risks and avoid costly delays during the M&A process. It’s also important to know who is involved in the approval process and who makes the approval decisions. Is it the buyer's board of directors, key executives, or even external advisors? Knowing who those decision makers are helps you understand who needs to be convinced and how to best position your company.

How do you see our company fitting into yours?

Does the buyer intend to acquire your company or merge with it? If the buyer is acquiring your company, will your company remain as a standalone business with little or no change? Will it be fully integrated into the buyer's company and no longer be an independent entity? Or will there be centralization of some functions such as finance and marketing, with other functions left as is? If the buyer plans to merge with your company what will the ownership and control structure look like after the merger? What roles will your current employees have after the merger? These are questions that relate to the way the buyer sees your company fitting into theirs. It is crucial that the buyer's vision regarding your company’s fit aligns with your vision and goals because it has a wide range of serious implications, impacting areas such as integration, employee retention, and the long-term viability of your business. If your and the buyer’s vision regarding your company’s fit don’t align, the deal won’t work.

What’s your integration process?

 You want to ensure that the M&A results in a smooth, clean fit between your company and the buyer's company. In particular, you want to ensure that your employees and your customers are properly taken care of after the deal completes. Overall, you want to protect against any potential issues that can damage the value of deal and damage your company's legacy.  To accomplish those goals, you need to understand the buyer's integration plans. Understanding those plans helps you identify potential issues that can get in the way of a successful transition. That knowledge can also help you identify possible culture clashes between the two companies. Identifying these issues gives you the opportunity to address them. If you don’t address those issues, they can tear the deal apart or create significant problems after the deal completes. Ultimately, you want to ensure that you and the buyer are working toward the same post-transaction goals and have an aligned view of what the combined entity will look like. 

Who are your outside advisors? 

Understanding who the buyer's outside advisors are gives you important insights into where the buyer's focus will be. For example, if the buyer uses a top accounting firm, you can expect a particularly thorough accounting review during due diligence. If the buyer uses a top legal firm you can expect a very close examination of the legal aspects of the deal. Understanding who those outside advisors are can give you insight into the buyer's strategic goals and how they align with your own. It can also indicate how serious the buyer is about the deal. A buyer that uses highly experienced, well-regarded advisors is more likely to be a serious and competent buyer, which can give you more confidence in the deal's viability. In general, an experienced buyer will likely have a team of outside advisors to conduct due diligence. Understanding this means that you should be prepared for a rigorous process and not try to go it alone.

How did your acquisitions work out?

As mentioned previously, knowing that the M&A and integration processes went smoothly in previous acquisitions by the buyer gives you confidence that your deal will go smoothly too. However, knowing there were problems in past acquisitions can be cause for concern. Those past acquisitions can reveal valuable insights into the buyer's post-acquisition integration strategy, payment history, and overall trustworthiness.  It can also help you assess the buyer's credibility, predict how the current transaction might proceed, and identify potential red flags. 

Can I talk to companies you have acquired?

If you can talk to representatives of companies that the buyer has acquired, ask them about their M&A and integration experience. It will give you insights into the buyer's strategies. It will also help you gauge the buyer's capability to successfully transact and close the deal and it will uncover potential red flags that can jeopardize the deal. Compare what these company representatives say about their experience with the buyer to what the buyer says about themself. It's a good way to verify the buyer's credibility. 

Corum can help 

Using an experienced M&A advisor such as Corum can help you find and qualify the right buyer. Corum's global search process backed by the largest buyer database in the industry is designed to bring multiple serious buyers to the table and weed out the so-called “bottom feeders.” And Corum's advisory team, comprised of ex-CEOs who have years of experience building and selling companies as well as interacting with buyers in the M&A process. Corum provides the assistance and guidance you need to get you to an optimal deal.