How To Sell A Business As A Bolt-On
Short answer: Don't!
Describing a business as "an ideal bolt-on" is an act of severe self-harm!
One of the biggest mistakes business owners make is claiming that their business would be good as a bolt-on.
I believe vendors should never, ever say refer to their business as a potential bolt-on or as an ideal bolt on. Saying that immediately loses them, probably, about 20% to 30% of the value in their business.
Vendors may see the ideal buyer as, perhaps, a multi-national or a listed company in the same industry or a related one.
What they expect is that a large firm in a similar line of business will see synergies from the acquisition and will therefore be in a position to pay them a higher price. The thinking is that such an acquirer will be able to make oversized profits from the business, over and above what a "financial buyer" would be able to make.
The logic is sound, very sound, but how do buyers / investors perceive the "bolt-on" term?
Here's what the bolt on term says to an investor
What you're actually saying is that your business needs to go to someone in the same industry, someone who understands the sector.
It suggests that some key talent required to run the business - perhaps the owner / manager - will be leaving and needs to be replaced hence your need for a buyer who can fill the gap.
You need, you need.
Buyers want businesses that are capable of running independently, not those in need of a crutch. Here are some of the right things to say to impress investors.
You're presenting that you're in a position of vulnerability as you are not an attractive target for anyone except a firm that already understands your sector. It says that your options are limited, that you are going to be forced to make concessions on price because you don't have a choice of the best buyers.
Don't agree?
The reason vendors refer to themselves as is because they think that makes them more valuable, or at least more desirable.
Unfortunately, it does the opposite. It damages value.
Here's what Divestopedia says about bolt-ons:
Bolt-on acquisitions are usually smaller companies with very little financial and administrative infrastructure. They are typically operated by the company owner and ...may have unsophisticated financial systems, IT and internal controls, but are usually excellent operating companies with good customer relationships. This is why private equity-backed platform companies or corporate buyers with the infrastructure in place can be a perfect fit. Given the lack of infrastructure at these (bolt-on) companies, buyers will usually pay a lower valuation multiple for a bolt-on acquisition than they would for a platform company.
If I may repeat that: Buyers will usually pay a lower valuation multiple for a bolt-on acquisition!
Some background to the bolt-on perception
The type of buyers constituting these businesses are targetting are not people who act on impulse. They have sophisticated financial experts advising them, whether their own Finance Director or a third party corporate finance firm.
Their board will act based on the advice these experts give them. Here's what they experts are telling them: "This is a defective investment". They are telling the buyer that he should buy the target only if this defect is reflected in the price ie. they're looking to make the acquisition on the cheap.
To them, the target has painted itself into a corner; it's a business that's excessively reliant on the owner/s personal skills. The business desperately need someone like them to fill the skill gap left by the current owner/s departure. It's not a business that'll have wide appeal, the pool of buyers will be extremely small and it may be that they are the only compatible buyer.
The vendor will be made to suffer for that flaw by accepting big concessions on price.
Vendors need to know how their BUYERS think!
It's always a good idea for the seller of a business to know how the people with the money think.
While they are prettifying their numbers and raving about the "awesome potential" in the business, buyers are making far more mundane assessments.
If it's a bolt-on, rather than an acquisition that can stand on its own two feet, they've got to plan for transition, for transferring assets and resources between their current business and the target, for executing plans to extract synergies etc. It's a lot more work for them, and a lot more risk.
They are trying to work out the skill gap that they are going to have to fill. They are trying to work out how much it'll cost them in wages to hire that talent (or whether they can spare existing talent from within their own organisation). And they're trying to work out what impact all this will have on the figures going forward - both the target business performance figures and their own.
If they buy a business that is not a bolt-on, they can just leave the business to get on with what it's doing. There's no further time to be invested, no additional cash to be pumped in to make changes, no resources from their own business to be diverted, nothing.
Not so with a "bolt-on" (which is a pain-in-the-ass kind of acquisition).
With a bolt-on they also need to assess how they can integrate the target business with theirs, what systems will work well together, what processes and procedures of the target's (or theirs) need to change. Will the target's accountancy package "talk" to theirs? Will they have to dump all the target's existing packing material and reorder new stock with their own branding (or a co-branding)? Will they have to sack staff at either company (and how much is that going to cost in redundancy)? There are a million questions to be addressed most of which have cost or performance implications and can be hugely damaging to their own operation if they don't get right!
There's a lot to consider because this is more like a merger than an acquisition!
Mergers are complicated, expensive affairs that often go wrong. They require operational, management & cultural changes to both organisations. They are far riskier. And, the buyer is thinking, that's another reason why the offer price should be lower than it otherwise would be.
So what should a vendor do instead, if they need to sell the business as a "bolt-on"?
The trick is to play on'es cards carefully and try press the point about being a bolt-on!
Or, better still, a smart vendor would fix that dependency flaw. That may take some time, and it's not always easy to fix, but fixing such flaws before going to market is likely to have a significant impact on price.
But it was the business broker who advised listing as a "bolt-on"?
Sadly, many business brokers and business transfer agents don't understand that calling a business a "bolt-on" is not a good idea. Perhaps they should read this article.
Or, better still, vendors should look for another broker! (How to choose a business broker)
For businesses with turnover of £5m and above, or making a net profit of £500K per year, we offer a service of assisting with finding the perfect party based on your business size, sector, exit preferences and other criteria (out of the 1,000 or so players in the UK). If you're large enough to afford a decent broker, you should get in touch for assistance with finding the right business broker / M&A advisory firm.