There’s a lot to think about when buying a company. For Pharos Capital Group, one of those things is who could potentially be the company’s next buyer.
“Exit planning starts when we’re in the diligence process,” said Anna Kovalkova, a partner at Pharos Capital. “We want to have a clear understanding of who will be the potential buyers of the company once we grow it.”
Kovalkova spoke at this year’s Nashville Dealmakers Conference about the importance of understanding and identifying the different types of buyers for each deal from the start, as well as why counseling sellers to find the best advisers can improve end-goal outcomes.
Understand the field
Kovalkova said it’s important to know the players in certain categories — having a clear sense of the EBDITA thresholds and growth expectations of PE firms as well as the types of companies strategic players are likely to target, will help a buyer significantly.
“That understanding is important,” she said, “as our management teams have a clearer path as to what size they need to grow the company and what is that field of potential buyers.”
Still, she recognizes the path isn’t always what you plan it to be. There are typically changes or diversions or stumbles, even unexpected wins, because the effects of the surrounding market can’t be reliably predicted.
“If all of the sudden a certain sector becomes hot and multiples are very attractive then you may go to market a little sooner than you planned, or vice versa,” she said.
Kovalkova said it’s important to keep a dialogue going with investment bankers as well as potential sponsors of different sizes. And not just one-way communication — from Pharos to potential buyers — but getting feedback from the potential pool of buyers on what sectors have their interest as well as the size companies they’re looking for. For example, she says one firm had been looking for companies in the $25 million to $30 million range, but recently stepped those financial requirements down to broaden their search options to include companies in the $10 million to $15 million range — a significant change, and one that could influence Pharos’ decision-making.
According to Kovalkova, it’s incredibly important when sellers have competent advisers. As an example, she said the firm had a transaction it was working for more than a year with a founder-owned health care business. Unfortunately, it was represented by an attorney who didn’t have experience selling companies in that industry.
“The short story is we didn’t close the deal,” Kovalkova said.
That’s why Pharos tries to counsel sellers early on which advisers — attorneys, investment bankers, accountants — could help them get the best representation possible for a transaction. It could help all parties reach the best outcome in the end.