*Article published and written by Mergers&Acquisitions. Chris Vanderzyden was a contributor to the article.
First, says Wallace, it was flattering that buyers were interested in their growing business. But eventually, the ongoing barrage of inquiries became difficult to navigate.
“As we received more solicitations, it was impossible to know who a worthy partner was,” Wallace says. “If you’re in an industry that private equity is targeting, it can be overwhelming.”
In 2023, Wallace and his partner sold their company to Pet Resort Hospitality Group, a platform company backed by Trivest Partners, primarily because of PRHG’s vision for the future of pet care, and because of a previously established relationship within the group. Wallace also stepped in as PHRG’s chief operating officer, and now contacts other doggy daycare owners, sometimes with the aid of brokers, to potentially partner and help them grow their companies.
Wallace’s experience mirrors that of most successful business owners. By all accounts, there’s been a huge uptick in unsolicited calls, emails, direct mail outreach — generated by private equity firms (often through lead generation middlemen), strategic competitors, fundless sponsors, buyside brokers and others.
PE firms are sitting on a heap of dry powder. With precious time ticking away, these investors need to put money to work creating a very competitive environment. It’s forced them to be more dogged in trying to get business owners to engage whether the owner is contemplating a sale or not. Oftentimes these prospective companies don’t have “sell” on their radar.
“There’s more money out there looking for a home than there are good businesses to buy,” states Robert Scarlata, senior managing director of WhiteHorse Partners, a Nashville-based M&A advisory firm. WhiteHorse works with sellers and buyers, including Saw Mill Capital-backed Industrial Refrigeration Pros, currently seeking add-on acquisitions. The firm conducts due diligence for IR Pros, and offers potential sellers, who are often contacted directly, a free valuation. “We have a very good process for holding the hands of business owners and getting them through closing,” Scarlata says.
It’s clearly a strategy that works. IR Pros completed nine acquisitions since its founding in 2021, and most recently, in April 2024, snagged Florida-based Refrigeration Services. “Most of the people in the industry that I call know me now,” states Curtis Czemeres, founder and CEO of IR Pros, who does the target seeking.
COMMON PITFALLS FOR SELLERS
- Buyer promises a quick close on a deal
- Buyer demands exclusivity with the LOI
- Buyer presents a deal that sounds too good to be true
- Seller hires a banker too late into the process, limiting ability to negotiate
Is “Unsolicited” a Dirty Word?
So, what’s the big deal about unsolicited outreach? It seems like it could work, right? Such moves can bring two parties together for each other’s benefit. A seller can forego advisory fees and bond with their prospective acquirer to help future relations.
Buyers can be crafty, and inexperienced sellers can make mistakes, divulging sensitive information too soon or settling for unfavorable prices or terms that can hurt them and their employees.
“Not all private equity firms are created equal,” notes Eliot Peters, a principal with San Diego investment bank RA Capital. “Some are looking to pay reasonable prices and pay fast and some are hunting for bargains.” Roughly 90 percent of unsolicited communication comes from professional cold callers hired by buyers, he states, and “a lot of these unsolicited offers are not worth the paper they are printed on.”
“These seasoned callers also may know nothing about the industries they are pursuing, says Chris Vanderzyden, president and CEO of Legacy Partners, an exit planning advisory firm in Boston, and a strategic partner of The DAK Group, a middle-market investment bank. Multiple clients have approached her with an offer in hand. “They are off guard, unprepared and haven’t done any planning to exit the business,” she says. And green company owners who pursue unsolicited deals can overpay on taxes, settle for a paltry price or agree to terms that could prompt future litigation.
“Unless they’ve gotten advice from third parties, many times sellers don’t know what their business is worth,” echoes Michael Kroin, CEO and managing partner of Physician Growth Partners, a Chicago healthcare investment bank.
Red Flags
Of course, many buyers who go direct to sellers pride themselves on their integrity. They want a win for all involved and in some cases, it is. But business owners should recognize several red flags when unsolicited calls or emails come in.
Some buyers entice owners by saying the deal will close quickly—an untruth. “It takes three to four months of intense due diligence, and the sellers are going to get worn out, and say, ‘I don’t want to do this again’” because they are in misery, Peters predicts.
Other buyers push owners into exclusivity, and then renegotiate prices when under letters of intent, knowing sellers have no leverage. “There are a lot of scammy type characters in the industry, and you really have to do a good job of vetting who you are talking to,” advises Sequoya Borgman, founder and CEO of Borgman Capital, a Milwaukee-based investment firm that buys lower middle-market companies. The firm has a 15-person team that sources deals, though its best transactions come through its network, not from direct outreach which has had a “very low success rate,” Borgman admits. In May, the firm acquired Michigan-based Harlo Corp., an 88-year-old family business and maker of rough terrain forklifts. Harlo was up for sale through Michigan M&A advisory firm Calder Capital.
Borgman warns sellers to be cautious if deals seem too good to be true. Some brokers will also “line business owners up just for the retainer” and will “do very little to help them sell the business,” he adds.
“There are a lot of scammy type characters in the industry, and you really have to do a good job of vetting who you are talking to.”
Sequoya Borgman, Borgman Capital
Unsolicited Protocol
There’s no playbook as to how business owners should engage with unsolicited callers, with no advisors immediately present. The calls come unexpectedly, and owners must determine how they want to proceed.
Some M&A experts say owners should speak with callers, without revealing critical information. “Use the phone call to interview them versus them interviewing you,” Kroin advises. He also warns of delaying the hiring of an investment banker, at a point when it’s too late to negotiate.
Others advise ignoring communication from unsolicited suitors, but to log it and save names for a later date, when an experienced advisor can help. “When a counterparty knows sellers have professional representation, they are not going to try to hoodwink them,” Peters says.
Borgman, whose firm conducts some unsolicited outreach, says owners should research the buyers calling, gather testimonials and ensure buyers have a good track record and funds to support a deal, before signing an LOI.
“When a counterparty knows sellers have a professional representation, they are not going to try to hoodwink them.”
Eliot Peters, RA Capital
Investment bankers and other advisors representing sellers add value and a huge certainty of close, Borgman notes. But he also enjoys working directly with sellers: “The good part from our side is you get to know the owner really well and build a level of trust and the transaction goes smoother post-close,” he says. Sometimes bankers put up a “Chinese wall” that limits the ability to interact directly with sellers and build up that same level of trust, and “it’s not like we pay a lower multiple if there’s not an investment banker,” he adds.
Scarlata says he is “shocked” that many entrepreneurs don’t receive the proper counsel when selling their most valuable asset, though he also likes working with sellers directly since he and his clients try to protect the sellers and know their respective industries well. But owners “will never know if they left money on the table if they don’t spend good money on the intermediary,” he adds.
CLICK FOR MORE INFORMATION
CONTRIBUTOR
Chris Vanderzyden
