Deal origination
Off-market deals: how a direct approach looks from the owner's side
Off-market deals in private equity depend on an owner choosing to reply, so this piece follows one direct approach from her side of the desk.
A letter reaches the founder of a managed IT services company in the South West from someone she has never heard of, saying that a buyer would like to talk about acquiring her business. She founded it in the early 2000s, and it now employs about 45 people. She is in her late fifties, and she has never thought seriously about selling. She is invented for this piece, though the letter is a familiar one.
Buyers send such letters as a matter of routine. In a survey by Gompers, Kaplan and Mukharlyamov, private equity investors said that almost 36% of their closed deals were proactively self-generated. Most of the responses date from 2012. Off-market deals in private equity begin with an owner like her deciding whether to reply. Almost everything published on them addresses the sender. This piece follows one approach from her side of the desk.
Few of the letters an owner receives come from a buyer
An established company attracts a steady flow of letters about its future. Business brokers write in the hope of winning a mandate to sell it. Data and marketing firms usually want to sell her a service. A rival may be a genuine buyer. One fishing for information asks early about her customers and pricing and says little about why. Somewhere in the pile there may be a letter from someone acting for a specific buyer, and her first job is to find it.
She can check much of this without replying. The sender of a genuine approach usually says who it acts for, or at least what kind of buyer it is, and refers to her company in terms that could not be pasted into a letter to the firm next door. It also asks for a conversation before it asks for figures. A request for management accounts in the first message suggests a sender who wants information more than a deal.
She may also wonder whether her company's name is being passed around. A buyer gains nothing from spreading it, so she can ask who else has been told and expect a plain answer.
If an approach reads like a broker's mail-out, she will treat it like one, however serious the buyer behind it. The piece on how deals reach buyers by the direct route describes that process from the other end.
Her first question is how they found her
The honest answer is usually the public register. Companies House holds a company's filed accounts, its directors and its people with significant control, and a company must tell Companies House who those people are and report any changes (Companies House). Every director's name and nationality are public. For directors appointed after 10 October 2015, only the month and year of birth are shown. Home addresses are held privately, and the public record shows a service address instead (Companies House). Details of people with significant control are largely public on the same terms, so the register also shows who controls the company.
The accounts say far less. A small company need not currently send its profit and loss account to Companies House, and it may file abridged accounts with a shortened balance sheet if its members agree; micro-entities can file even less (Companies House).
A buyer can therefore see who owns the company and roughly how old she is, and can see very little about how it trades. With so little to price, a buyer asks for a conversation and names no figure. The same gap should make her sceptical of a letter claiming that the sender has been following her business closely, since her filings would not let anyone follow it very far.
In her case the letter went to the registered office, which is her accountant's address, an arrangement Companies House allows with the adviser's permission. The accountant forwarded it.
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Confidentiality matters more to her than to the buyer
Her first worry is who else might hear. Two senior engineers have been with her for over a decade, and her largest client would want to know who will be running its support contract next year. If the engineers or the client heard of a possible sale before she had decided, an engineer might start job hunting and the client might put its support contract out to tender.
The first message should settle this. It should say that the conversation is confidential and that nobody else in her company has been contacted, and whether the buyer will be named now or once she agrees to talk.
A confidentiality agreement usually comes before any financial information changes hands. It protects the owner at least as much as the buyer, because it limits what the other side can do with her figures and whom they can tell. Any approach to a named owner also has to follow UK data protection and electronic marketing rules, and she can ask how her details were obtained.
A first conversation commits her to nothing
If she replies, the first call is usually short. The buyer's side explains who the buyer is and why this company in particular, and then asks about her plans and her timing. The numbers can wait, since she has no reason yet to share them.
She will want to know early what the business is worth. A buyer working from public filings cannot give a responsible figure, and a number given too soon tends to anchor everything that follows. If it is high, every later figure looks like a retreat. If it is low, she is unlikely to take the next call.
Who makes contact shapes the call. An operator from a company the buyer already owns speaks her language and can talk about engineers and service contracts, while someone from the fund can show that the money exists. A third party acting for the buyer can keep the buyer's name back until she is ready to hear it. The buyer's side of that choice is covered in the piece on who should make contact in a bolt-on search.
She can still bring in an adviser, and other buyers
Once talks start, she can bring in her accountant or a corporate finance adviser, who may sound out other buyers. If other buyers join, the conversation is no longer off-market. The piece on proprietary deal sourcing treats "off-market" as the strict sense of "proprietary".
A direct conversation can move at her pace. It also involves fewer people than a marketed sale, so word is less likely to reach her engineers or her largest client. The buyer, for its part, gets time with her before any auction begins. Before she goes far, she will also want her own accountant's advice on the personal side of a sale.
A buyer should expect to hear "not now"
Bain's authors estimated in 2017 that of every 100 potential targets entering a private equity firm's funnel, only one or two become a closed deal. The estimate suggests that a buyer writing to her has probably written to many owners in her segment, and that few of them will sell. The sources for this piece give no figure for how many UK private equity deals start with a direct approach, or for how often owners reply.
A business that is growing and an owner who still enjoys running it make a poor case for a sale. PwC's 12th Global Family Business Survey, which covered 1,325 family businesses in 62 countries and territories, found that 79% of its UK respondents expected to grow over the next two years and 68% had grown in their last financial year (PwC). The release gives no figures on selling or succession, and its UK figures are a cut of a global sample, but they describe owners with little reason to hurry.
If she says no, how a direct search treats owners who decline decides whether either side can come back later. She should not be chased again for the same search, and she should know how to get in touch if her plans change.
What she keeps either way
She now knows that a buyer exists for a managed IT services business of her size in the South West, and that its letter asked for a conversation and named no price. The letter sits in her desk drawer, with the sender's name and a direct line written at the bottom.
