It’s nice to meet you … but you’re an outsider.

It’s nice to meet you … but you’re an outsider.

When I am selling an Internet service company most of my marketing efforts are proactive. I reach out to 100’s of prospective buyers and investors who are already in the industry, or a closely related one. In addition, I am approached by prospective buyers wanting to look at my sellside client’s company. My first glance at a buyer who approaches me is to determine if the company they represent is in the industry or a closely related one. If not, they are probably an “outsider”.

Why this is usually a bad thing.

1) This buyer is probably going to do two very smart things … be paranoid and take their time. In analyzing this deal this buyer has a lot to do over the next few weeks & months. They have to learn about the industry, learn where my client’s company ranks within the industry, quantify the pros and cons of each of the value drivers of my client’s company, then come up with a valuation and proposed deal structure. Not only are they going to take way too much of everyone’s time to come to a valuation and offer conclusion but much of that time is likely to be spent obsessing about the wrong things. The problem with their own diligence is they are competing against buyers who are already in this industry, buyers who understand the inner workings of all of the value drivers … hence “insiders” move through the analysis process to the valuation and offer stage much faster.

2) The “outsider” cannot realize cost savings and other synergies which make a higher company valuation logical, so the “outsider” will almost never be the highest bidder … and if they happen to be, the completion risk (from LOI to closing) is uncomfortably high.

Side Note: If the “outsider” does close the deal, the likelihood of the acquisition producing the originally forecasted ROI for their shareholders is much lower than an “insider” acquiring the same deal. In my opinion these “outsider” acquisitions make up a notable portion of the commonly thought 50% of M&A deals which end up being shareholder value destroying events.

Moral of the story:

It is safer for a buyer and their capital to “stay in their lane”. Worded another way … I would never invest my money in a private company acquisition in industries where I am an “outsider” … such as hospitality, medical, manufacturing, construction, tourism, entertainment, energy, and a few other spaces … why? because after spending 20 years in the Internet service industries, I realize that I don’t know anything about how these other industries REALLY work … and worse … what if I end up being the highest bidder for one of these companies?

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