The metrics of selling an electrical contracting business

Earlier this year, CFSG was engaged by a specialist electrical contracting business to help the owner achieve a successful exit. We believe it is worthwhile for other business owners considering selling their business to walk through some of the key steps in this sale process and to also understand the main marketing metrics involved in selling a business.

For context, the business in question had been in operation for more than 20 years. The owner who is in his 60s came to the view that he no longer had the drive to continue running the business day-to-day. He had amassed an impressive list of longstanding, blue-chip clients, maintained a stable team of experienced professionals and had built up a large pool of unencumbered plant & equipment. Both CFSG and the business’ owner saw its longstanding client relationships as a key value driver for any potential acquirer.

Preparing for the sale

After considering the possibility of completing a management buyout (ie. selling the business to an existing employee or group of employees), the decision was taken to prepare the business for a formal sale process. That involved the usual steps of engaging with the company’s lawyers and accountants to ensure that the business’ house was in order and that it would present itself in the best possible light to prospective acquirers.

For more information on preparing a business for sale, please click here.

For a detailed article on due diligence, please click here.

In addition to preparing the business for due diligence, CFSG prepared two key marketing documents: a no-names flyer and a more detailed information memorandum. The no-names flyer is intended to provide a potential acquirer with enough information to determine whether they are potentially interested in the opportunity – without revealing that ‘Company X’ is formally on the market.

Most private business owners are reluctant to formally announce to the market that they are up for sale. Understandably, they believe that it sends a worrying message to competitors, employees and customers that can lead to staff and customer churn. That is why a key consideration for CFSG is to maintain the highest levels of discretion throughout any sale process.

The information memorandum (or IM) not only names the company that is up for sale but also provides far more detailed information on the business – its customers, its financial history and forecasts, its organisational structure, key personnel and so on. It is important to note that the IM is only shared with a prospective acquirer once they have completed a detailed confidentiality agreement.

While the goal of the IM is to be expansive, it is also common practice for a business to keep particularly sensitive information confidential until at least a formal offer has been received from a given party or the parties have formally entered due diligence or even until after the final contracts of sale have been completed. In this particular instance, the client did not perceive there to be any risk in sharing all key business information – under the protection of a rigorous confidentiality agreement.

The all-important “hit list”

In addition to preparing a business for external scrutiny and drafting the various marketing documents, a key role for CFSG in any sale process is preparing a “hit list” of potential buyers. These are the companies that CFSG will directly reach out to in order to gauge whether they might be interested in the opportunity.

This is always a collaborative process with the client. Key questions that we asked the owner is whether any companies had previously approached the business about a potential acquisition. Clearly, all things being equal, they would be added to the “hit list,” though after many years of experience, we now treat these sorts of previous approaches and discussions with a degree of healthy realism. Please click here to understand why.

Either way, the answer in this case was that the business had never been previously approached by any potential suitors. The next obvious question we asked is who, in their view, might be a likely buyer for the business and why. This question elicited a list of seven companies who, in the owner’s opinion, might be interested in acquiring the business. And what would their motivation be? Primarily to secure the handful of blue-chip clients the business had developed – several that had been with the business for over a decade.

CFSG also set about supplementing the emerging “hit list” with potential acquirers that we identified through our own independent desktop research and existing knowledge of the industry. Typically, we will also reach out to contacts in the industry to get their thoughts on who might be looking for acquisitions of the type we are looking to bring to market. However, in this instance, we did not have those pre-existing industry contacts.

We then presented the results of our research to the client for consideration. After a review of our proposed “hit list”, we collectively settled on a final list for marketing purposes. Based on those discussions and the client’s insights, we divided the “hit list” into what we call an inner and outer circle. The inner circle are those parties that we agree are most likely to be interested. We always reach out to them first to get a quick “read” on the market’s interest in the opportunity.

Some headline metrics on the campaign

To use a well-worn cliché, this is when the rubber hits the road: when we formally commence marketing the acquisition opportunity. Like any sales process, marketing a business involves a typical sales funnel – where leads or prospects are gradually whittled down until a handful of actual buyers emerge.

As a side note, from an adviser’s perspective, selling a business is a process of highs and lows – moments of excitement and confidence and moments of uncertainty and even dispiritedness. However, if we have learnt anything over the years, it’s that the key is persistence and sticking to the process. It is also essential to have a well-briefed client that is kept constantly up-to-date with all developments – good and bad!

To give the reader a sense of the campaign, CFSG assembled a “hit list” of 47 separate companies. That is a significantly larger number than usual. A typical “hit list” would be between, say, five and, perhaps, 15 different businesses. Of the 47, we identified 10 that we considered the inner circle. Having said that, CFSG reached out to each of the 47 companies on the “hit list.” We did so using a variety of different methods: direct telephone calls, emails and different approaches using LinkedIn.

Of the 47 companies on the “hit list”, we ended up sharing 21 no-names flyers, which is approximately 45%. Because the flyer is “no-names”, we typically share it with any party that expresses any level of interest in learning more. However, informally, we estimated that less than half of the recipients were genuinely interested in and positioned to complete a transaction. The rest were “tyre kickers” exercising standard curiosity. However, at the “no-names” stage, we prefer to adopt a nothing ventured, nothing gained approach.

From the 21 parties that received the flyer, only two received an IM after completing a confidentiality agreement. That corresponds to 9% of those who received the flyer and only 4% of the original “hit list.” It is worth noting that only one of the two was part of the original inner circle.

There are important insights that can be gleaned from this campaign. In most instances, you need to talk to a lot of companies, and to do so with an open mind, before you find a potential buyer for a business. Often those companies that you think will be “red hot” for an opportunity are not remotely interested, and companies that you never thought to be likely buyers, show the most enthusiasm. Again, this highlights the importance of following a process.

In addition, no matter how widely you may cast your initial net, a transaction typically comes down to only one or two interested parties. However, that is often all you need to build genuine momentum towards a transaction. The key is following a clear process and remaining diligent in seeking to actively engage with and then follow up with all the groups on the “hit list”. This can be a time-consuming process, but it is the surest path to success.

If you are interested in discussing how CFSG can assist you in selling your business, please don’t hesitate to contact us.