Insights

What shade of yellow ?

When your advisors eventually turn their focus from internal discovery to market outreach later in the acquisition process, they will start to develop an initial longlist of potential candidates for acquisition.

It will be a long list, too lengthy for you to scrutinize every prospect. However, if you were to review it, you would see, en masse, a collection of businesses that are generally what you are looking for, and that all match the target criteria in some way. That is not by accident; it reflects the diligence you have put into the process so far and the expertise of the M&A Advisors you have engaged.

I will discuss the nuances and details of the Market Outreach phase and how we develop target lists in later posts, but it is also worth some attention here while we are still focused on preliminaries. As with everything else in the acquisition process, good market outreach is rooted in good preparation from the very beginning.

What comes to my mind is the hapless Sir Galahad in Monty Python and the Holy Grail, who meets his end at the Bridge of Death in this most unfortunate way, when required to answer correctly:

Old Man: “…what is your favorite color?”

Galahad: “Blue… No!… Yel—aaaarrrgh!!!

In initial discussions with your M&A Advisors, the questions asked can feel like they come with high stakes. A lot is riding on the outcome of the search process, and as you seek consensus from stakeholders about what you’re looking for, the back-and-forth can threaten to overwhelm you.

In the end, though, this part of the process is as simple as asking “What is your favorite color?”.

Your advisory team can then get to work eliminating Blue and instead start the hunt for Yellow. It is about beginning our early search for the best candidates in the right place and searching for the right ‘color’ target.

With the clarification we gain in the first steps of the process, your advisors help you develop an Acquisition Filter. This tool enables us to sift through the thousands of potentials and remove everything that does not satisfy the complex criteria we have established with you for what makes a company Yellow.

For example, our preliminary market survey may generate the names of 700 companies that fit those parameters. A list of that length isn’t yet a workable resource, but it does equip us for an important discussion. At this point, your advisors will sit down with you, show you a list of hundreds of generally viable prospects for acquisition and say:

“This is what Yellow looks like. Now… what shade of Yellow?

That is to say—we help you refine your criteria, identifying the right sort of company doing the right sort of thing, at the right time, in the right location, for the right price… becoming much more specific.

Once you have a list, however long, of concrete options in front of you, it often proves easier to get a sense of which specifics matter most to you. Key values and non-negotiables will surface; your gut will help guide you.

That is a good thing. It is the path that gets us from the longlist to the shortlist. Not all generally suitable companies are specifically suitable for you to buy. Not every yellow is the right yellow, so we begin making informed eliminations.

We remove candidates from the field who don’t match the criteria. This stage of the process is about focusing on the absolute best fit for the needs of your company.

Our first round of eliminations will cut hundreds of the wrong shade of yellow from the pack, in our example reducing the list from 700 to 150 or so. Every iteration of the list will become increasingly more focused on the right yellow. Fewer and fewer shades will be obviously incorrect. At this point, if you have good advisors, you will be walking in sync, probing your business, your strategy, your direction, and your needs down to the finest detail.

The result is, finally, a list of candidates that matter. The 150 have been cut down to 30 prospective acquisitions, each with a detailed profile and the information you need to begin discussions with the best of the best. If your M&A Advisors have done their job thoroughly and with integrity, you will then be able to tackle the list together and find somewhere on it your exact shade of Yellow.

Again, the accuracy and usefulness of that target list of best prospects, developed later in the process, depends upon solid preparation at the beginning:

  1. Do the exercises now.
  2. You may be a year away from beginning the process of buying a business. Commit yourself to a robust, dedicated preparation process now. If you have the time, start simply by asking yourself and your stakeholders the question ‘What is our shade of yellow?’

  3. Find eager M&A Advisors.
  4. You won’t have any problem finding M&A Advisors who are eager to get the deal done and see money changing hands. Do not work with a team unless they are just as excited about the preparatory work. The quality of your market outreach and the final deal you sign are entirely dependent on the quality of your initial preparatory work together. If you get the sense that your potential advisors are in a hurry to find a bargain and close the deal at the expense of careful effort, walk away! They do not care about your favorite color.

In my years at Stillwater Capital, I’ve seen the benefits of dedicated preparatory work. It pays off, and so we insist on it.


Start the conversation with us about buying a business the right way, by contacting us here.

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Written by: Douglas Nix