VERTESS Answers: Why Do I Need to Market My Company to Buyers?

Volume 11, Issue 7, April 9, 2024

By: David Purinton

If you own a healthcare company, you are probably receiving inquiries from interested buyers. We view this as buyers marketing themselves to you. At VERTESS, we emphasize the importance of clients marketing their company to buyers as a key step in securing the eventual right buyer and partner.

With potential buyers coming and marketing to you, why should you put in the time and effort to market to potential buyers? 

To answer this question, it's helpful to take a step back and understand the current market for sellers and buyers, specifically focusing on the lower middle market. This market has the vast majority of operating companies since most companies have under $150 million in enterprise value, as the following chart represents:

Given the volume of potential targets, there are more investors in the lower middle market than you can probably imagine. The role of these investors (i.e., buyers) is generally to acquire founder-owned companies, professionalize them, scale them organically and inorganically, integrate them, and then sell the larger entity to the next investor. The acquired company scales up as it passes through the hands of various investors. 

These investors are financially motivated to market themselves as the appropriate buyer for your company. After all, they stand to make millions of dollars when their acquisition and subsequent growth and transaction strategies succeed. They're aggressively trying to find companies to buy and then execute these strategies.

Buyers view their outreach efforts as a sales cycle. They reach out to X number of business owners, hope that Y number of business owners will engage in discussions about selling their companies, and then the buyers weed out the companies they don't want to own, ultimately acquiring Z. In this sales cycle, buyers are essentially in control.

Owners who market to potential buyers take control of the sales cycle — one that's very similar to the cycle executed by buyers. Owners, usually supported by healthcare M+A advisors like those at VERTESS, reach out to X number of potential buyers and hope that Y number of buyers will engage in discussions about buying the company. Owners and their M+A advisors then weed out the buyers the owners don't want to sell to. The remaining options are engaged in discussions about the potential acquisition, ultimately concluding with the owner signing an agreement with Z. 

The Value of Control

Putting the power on your side of the equation matters. Consider the following reasons:

More likely to find the right fit. There are several thousand healthcare investors. Not everyone is going to be a good fit for your company. In fact, most will not. Similarly, a random buyer is not likely to magically be the right fit for you. When you control who you market your company to, you are more likely to market toward companies perceived as potential good fits.

Investors will know you're ready to sell if you're marketing to them. This increases interest and reduces risk. When buyers find potential targets by marketing to companies, the investors usually do not know how willing a seller is to sign a contract. Given the costs of due diligence, that lack of knowledge presents a six- or seven-figure risk.

However, when an owner markets to buyers, investors feel more comfortable spending money in due diligence since they know the owner is more likely to sign the contract at the end of the process. The appearance of an owner interested in at least considering a sale attracts a greater number of investors. 

Likelihood of better results. When you can identify multiple potential buyers who might be a good fit for your company, you put yourself in a position to leverage the interest in your asset to negotiate up valuation and terms. You cannot do this without leverage, as buyers aren't interested in spending more money to acquire your business unless they have competition — and competition perceived as legitimate and strong. 

Tips for Buyers

While we understand the strategy, we respectfully ask that you stop showing premium valuations in your letters of intent (LOI) to unrepresented sellers. You may not see it as a bait-and-switch tactic, but that's exactly what the seller experiences, and they leave the process believing the initial offer is still achievable with someone else. Even if re-trading has worked for you in the past, this is the kind of tactic that makes sellers skeptical of any buyer.

If you're looking for off-market deals, be prepared for the time and effort required to achieve a discount. First and foremost, develop the relationship before discussing valuation. If the seller asks for an indication of value too soon, you probably know it's not going to the finish line. Cut bait and move on until you find a potential seller willing to spend time forming a relationship with you that can eventually be leveraged into a sale.

If you haven't already done so, create a pre-LOI request list and open a data room. You should have about 75% confidence in a deal before signing an LOI. Submit an LOI that you would submit to an M+A advisory firm like VERTESS. Start with a cash deal you're prepared to execute, then add structure if there's a valuation gap. It's difficult to re-trade down.

Meet With Me at TCIV

I'll be attending TCIV East in Palm Beach Gardens, Florida, from April 15–17. If you will be attending this conference and are interested in meeting up to discuss the topics covered in this column or any other issue concerning M+A, please reach out to me using my contact information below.

Here to Help

If you're an owner thinking about selling, contact the M+A team at VERTESS. We're specialized healthcare advisors who help our clients with exit planning and executing that plan, including marketing directly to those buyers likely to be a good fit for your company and serious about executing an acquisition. We'll help you determine the right path forward for the sale of your business and then do much of the heavy lifting that typically ends with a successful transaction.

David Purinton MBA, CM&AA

After working in M+A advisory and corporate financial consulting, I was fortunate to co-found Spero Recovery, a provider of drug and alcohol recovery services with over 100 beds in its continuum of residential, outpatient, and sober living care. As its CFO I led the company to significant revenue and margin growth while ensuring it adhered to the strictest principles of integrity and client care. After selling Spero I remained in leadership with the buyer as its CFO and quickly realized accretion and integration. Of the myriad lessons not learned while earning my MBA with Distinction in Finance from a Tier 1 university, the most profound was the importance of investing in my staff and clients. I learned that the numbers on a spreadsheet represent humans, families, and dreams, which was a radically different paradigm from investment banking.

At VERTESS I am a Managing Director providing M+A and consulting services to the Behavioral Health, Substance Use Disorder treatment, and other verticals, where I bring a foundation of financial expertise with the value-add of humanness and care for the business owners I am honored to represent.

We can help you with more information on this and related topics. Contact us today!

Email David Purinton or Call: (720) 626-2500