It’s 8:37am on Thursday morning, and you have just sent your kids off to school. You pull up your phone to see who has emailed you in the hour that you’ve been away from it. You scan the preview of the top message that just arrived in your inbox:
Doug – hope this email finds you well. I was recently doing some research on your industry…
Seems like another fund is bothering you to have a “quick conversation.”
On one hand, you did have a good conversation with Alexandra. She was an investor you responded to late last year. She knew some metrics about your competitors. She seemed to understand what your business did and how it could grow.
In short, she was smart and useful.
But recently these emails have really started to add up. It now seems like there’s two to three new people emailing you every day.
What do they want and why do they keep contacting you? Should you ignore them, or should you take their calls? How can you get the most out of them?
From our perspective as an investment bank (working for founders on M&A transactions), here are a few thoughts about this ever-more-common situation.
Funds are contacting you to learn about your business (and eventually buy it). A private equity fund’s business model is simple: buy a business, improve the operations, perhaps merge it with other businesses, and sell it for more money than they paid for it. This cycle usually takes between 3-7 years for any given business they invest in.
They have to find these businesses and while investment bankers help to bring them deals, most funds also have a business development team reaching out to entrepreneurs and building relationships with them. These are the people contacting you.
Private equity funds care a lot about the financial profile of your business. During these calls, you will receive questions about your revenue, growth rate, retention, and other key metrics.
Despite what you may have read, private equity funds also prioritize the strategic aspects of your business. Along with financial metrics, they’ll also ask about your customers, team, and product. If your annual recurring revenue (ARR) is under $20m, many funds will consider you as an “add on” acquisition prospect. This means that you might be acquired by a company backed by the private equity fund instead of remaining an independent business. This isn’t a bad thing — these are often really good buyers. They move quickly, they can offer great deal structures, and are sometimes willing to pay a premium for a strategic asset (your company).
You’re getting more emails because there are more PE funds. By any measure, there are more private equity and growth equity funds than there have ever been. Historically, the asset class has earned a high return, so pension, endowments, family offices and other entities that give PE funds to manage want to give them more money.
More PE funds means that there are simply more people who can reach out to you, which is one driver. But there’s another driver of more emails that’s less intuitive.
PE funds are reaching out because they want power in a negotiation, or at least to build a relationship with you well in advance of a sale. Think about it from the fund’s perspective. Their business model is buying companies and selling them for a higher price. This model works well when they can buy a business for as little as possible and sell it for as much as possible.
Part of their search and outreach to you as an entrepreneur is because they are genuinely interested in your business and industry. But another part of it is to put them in a position to buy your business for a lower price. In a 1-on-1 negotiation, the buyer has the upper hand. Funds call these deals “proprietary” because they built the relationship on their own. This is in contrast to a banked deal (where someone like ScaleView helps the founder run a process) or a deal where the founder runs a process on their own.
With more PE funds comes a self-reinforcing loop that ends with even more emails in your inbox.
- With more PE funds, there is more competition for deals.
- With more competition for deals, it is important to build a relationship with a company in advance of a sale.
- Since it’s more important to build relationships, you’re going to receive more emails.
The conclusion of this cycle occurs when PE funds earn less, but for SaaS companies under $25m in ARR, there will continue to be more PE funds in the near future.
So what should you do about all these emails?
Talking to buyers in advance of an acquisition process is a neutral to positive action for you. As shown by the example in the opening of this article, most people in private equity are smart, personable, well-connected, and well-intentioned. Spending 30 minutes talking to them certainly takes away time from your business, but there are worse things you could do.
As it relates to an eventual M&A process, having early conversations can help you decide what non-financial factors matter to you. These conversations can show you how specific funds have bought and grown companies that look like yours. You can build relationships. This is what these early conversations are best used for.
But when you do sell your business, run an M&A process, even if it’s just to a small number of buyers. I can’t stress this point enough — it’s what I tell prospective clients the most often. In an acquisition, the best way to get a high price, favorable terms, and the highest chance to close a deal quickly is to have multiple competing bids. This gives you negotiating power because you can walk away.
The best tactic to generate multiple competing bids is to run a process. Often this involves reaching out to a large number of buyers (hundreds), though sometimes a smaller process is the right strategy. Who is running the deal process? is the question you need to answer. I’d recommend hiring an investment bank like us (or even one of our competitors!), though it is possible for founders to run an M&A process alone. A deal typically takes 3-6 months from start to finish and if you ran it on your own, it would need to be your top priority.
