Beyond the Price Tag: The Process of Getting an Offer
Imagine you want to buy an apartment in a prominent location. The seller tells you the following: “I have a 3 BHK apartment, 1200 sq. Ft. and 2 car parks. I am expecting a certain price, but I want to know your offer.”
What will your offer be?
Will there even be an offer?
Because if you are like most people, you won’t be able to make an offer. You will need more information…You will need to visit the property and physically check it. You will need to get your basic fact checks done before you can make an offer. You might even talk to a few local real estate agents/brokers or even appoint one to understand this location and if there are any location or apartment specific risks. In fact, the first thing you should do is to appoint a broker if you are serious about this purchase. I believe I don’t need to tell you the advantages of hiring a professional.
Now let’s look at this same situation from the context of your business. If you had to sell your business today or even consider succession or other options, what would you do? Let me share what we routinely see and hear…
‘I have Rs.100 Crore of AUM, 300 clients, and X revenue. How much will I get or What is your offer?’
“I have a SIP Book of Y, AUM of 200 Crore, 1500 clients, 6 team members and Rs.1.6 Crore revenue. What is your offer?”
Sellers generally want a sense of what their firms are worth. Thus, they resort to finding what other companies in our industry are priced at. It’s like a prospective buyer deciding how much to pay for a house by looking at other similar houses in the neighbourhood. This is the concept of relative valuation. While relative valuation can be done with very limited information, the challenge is to find the right comparable and then adjusting for differences…This is part art and part science.
The point I wish to make is there is no way any serious buyer will be able to make you an offer – this is the unvarnished truth.
Because as I mentioned in the apartment example above, the buyer will need more information. The above 3-4 parameters are simply not enough. The buyer has no clue about the 3 key drivers of value of your business – growth, profit, and risks (as you would know, there are plenty of them) pertaining to your specific firm. Additionally, unlike apartments, most practices/businesses in our industry/profession are not sale ready. The work that is necessary to make a business sale ready is often given a miss.
Remember, an unsophisticated, or desperate buyer might make an offer (which I doubt), but an educated (and able) buyer will certainly not be able to make an offer based on the limited data (AUM, number of clients, SIP Book, and revenue). As I mentioned in my previous post, Rs.1000 Crore Versus Rs.500 Crore, there are many (hundreds) factors that essentially lead to the 3 key drivers of value in a firm…
I am not really talking about the need for sophisticated due diligence by a third party (which is generally the next step), but any buyer must have sufficient information about your firm to make an offer.
The process often goes like this:
a. You express interest. In some cases, the buyer might reach out to you. I must make a special mention that there are a few unsophisticated buyers making offers to sellers these days. Beware of falling into this trap. I will be writing a separate post on this.
b. The buyer will require meaningful information from you such as
- Client Segmentation – by AUM
- Client Segmentation – by Age
- Value Proposition, Service Model and Promise made to clients
- Structure of Team + Skills in the team (in terms of Client Acquisition, Client Management and Others)
- The type of relationship you share with the client…Is it just an account or a real relationship based on mutual respect?
- Wallet Share of Clients
- Growth Rate of the last 3 years
- Financials of the last 3 years
The above are some of the basics required.
c. After you give this information, the buyer will analyse the data and make an offer. The offer will contain the following – The Deal Value and Deal Terms (Structure). The offer is normally given through a term sheet. However, given the relative maturity of M&A in our industry and profession, including the size and number of transactions, the offers are normally made without a formal term sheet but again the offers will contain 2 key things – the deal value and the deal terms. The term sheet offer though is subject to a detailed due diligence of the firm including all/most of these details that you have shared.
Deal Value indicates the value you will receive. Deal Terms though decide how you will receive it over time (including whether it is an all cash deal, earn outs based, payment in stock and terms based on (retention of clients, assets and revenue), and growth.
d. After an offer is made, you will then either agree, reject, or negotiate. Once the negotiation is complete, the seller starts the due diligence of your firm which may be conducted by third party firms (in case of large transactions).
e. The Due Diligence Begins. After this is concluded, the final definitive agreement is signed, and payments made as per the deal terms.
In the US, there are around 260+ M&A (Succession and Sale) transactions done every year (for the past 8+ years). In an environment like this, there is a strong ecosystem of investment banking firms, consulting firms, research, lending firms, private equity firms, and other resources available to both buyers and sellers. A buyer can also reach out to you through an investment banker or consultant. In India, we are probably in our first innings whereas the US is already in their fourth or fifth innings. The participation of PE firms in the US RIA space is at a very different level.
40+ PE firms with some of the world’s biggest including KKR, Carlyle, Bain Capital, Warburg Pincus, and others have entered the space in a big way. Typically, buyers and sellers both talk to investment bankers or consultants. They hire them to represent them or consult with them. These professionals even know the sellers and the buyers. There are professionals to represent the buyers and the sellers…We have a long way to go on that front.
It’s important to understand this process so that you don’t fall prey to buyers who themselves don’t know what they are doing. Just like real estate, your business is one of your biggest assets (rather it might even be the biggest asset). Seek the expertise of someone who knows how to value assets in our industry/profession. Your clients, your team, you and your family deserve the best…
On that note, I wish you and your family a very Healthy and Happy Diwali. May God Bless you with loads of great health, happiness and success.