Can You Buy A Business That Is Not For Sale?

By: Robert S. Kheir MBA, CMA

Robert is a senior analyst at CFA. Prior to joining CFA in late 2005, Robert was a financial analyst at Pitney Bowes Canada (March 2003 to September 2005) and business analyst at Hewlett Packard Canada (September 1999 to March 2003).

It's a fundamental question in a fragmented Private Equity market. For Private Equity Groups (PEGs) 'deal flow' has become a scarce resource, slowing investing activity for some and causing others to pay outrageous multiples.

PEGs are not paid to manage money, they are paid to make investments in growth companies, while accelerating this growth through the provision of capital resources for organic growth and acquisition. The lack of 'deal flow' hinders this very process.

As the old adage says "When opportunity does not knock, go out and build a door". Realizing their time constraint, savvy PEGs are now hiring investment banks to knock on doors, qualify potential acquisition candidates, all to create their own proprietary 'deal flow'.

A leading Boston based PEG, who retained the investment banking firm, Corporate Finance Associates, says, "When we generate our own proprietary 'deal flow' we are not succumbed to an auction process where we have no control over the end result".

The primary benefit of this arrangement is that the owner is talking to one potential buyer not several. "This keeps valuations in check and allows us to set the pace of the acquisition process", says the Boston based PEG.

Usually when the investment bank makes the initial cold call to a business owner, selling the business was the furthest thing from their mind. Most owners are too busy building their business or fighting fires to give divestiture a second thought. "Our call brings the idea front and center and they begin seriously considering a sale", says Doug Nix, Managing Partner of Corporate Finance Associates of Oakville.

In addition, with the economy in a state of flux right now, some owners may be playing the waiting game, fearing buyers may have retrenched as a result of what they have been hearing about the sub-prime market, the housing correction, and the overall health of the economy. It may be a pleasant surprise when they get that call to say there is interest to acquire their business.