Buying an off-market company: advantages, risks and best practices
Acquiring an off-market company is a strategy often favoured by investors or managers looking to grow through external growth. But what exactly is meant by "off-market" and what are the advantages and disadvantages of this type of deal?
What is an off-market company?
An off-market company is a business that sells without going through an official intermediary or an investment bank. Unlike an intermediated deal where the seller is supported by an investment banker to structure the process, identify buyers and secure the valuation, the off-market purchase takes place directly between the seller and the buyer.
The reasons why a seller may choose this approach are many:
- Avoid the cost of an investment banker's fees
- Favour a direct relationship with a known buyer
- Respond to a proactive approach from an interested buyer without a formalised sale project
Intermediated vs off-market file: what the buyer should know
For a buyer, receiving an intermediated file often means working with a company seriously up for sale, structured and supported by a professional.
Intermediated file
- Clear and structured process with timeline, key dates and prepared financial documents
- Easier access to important information (structured data room)
- Competition with other buyers
- Pressure on valuation and on the timing of the proposal
- Less direct relationship with the seller
Off-market purchase
- A direct relationship with the seller
- More flexible and adaptable timing
- The possibility to negotiate without the influence of an adviser defending the seller's interests
Proactive and passive approaches to identify targets
For off-market acquisitions, there are two main strategies for the buyer:
Passive, or opportunistic approach
Receiving files via one's network, investment banks, lawyers, accountants or professional associations. This gives quick access to companies already for sale, but these files often correspond to sectors in which the buyer is already known.
Proactive approach
Identifying and directly contacting companies matching the external growth strategy, to diversify one's portfolio, acquire a new technology or create a new service. The main disadvantage is the risk of contacting companies with little motivation, which can slow down the process.
Knowing which companies are up for sale without having to disclose one's identity first.
The value of working with an investment bank in acquisition
A buy-side investment bank, specialised in acquisition, can be a valuable partner:
What a buy-side bank brings
- Time savings through pre-selection and enrichment of information on targets
- An anonymous approach to identify companies open to a sale without revealing one's identity. This approach can be particularly effective for buyers wishing to target specific companies, suppliers or strategic partners, without harming the relationship if the company is not for sale.
- Access to market statistics and ratios, allowing companies to be analysed and results anticipated
Conclusion
Off-market acquisition offers a flexible and strategic framework for buyers wishing to:
- Develop their business in specific segments
- Create direct relationships with the seller
- Optimise timing and negotiation
In general, off-market acquisition is always an advantage. Then, the choice between a passive approach of receiving files, or a proactive one with identification of new targets, is made according to:
- The quantity of files received
- The suitability of the files received with the development strategy
- The importance given to external growth in the company's development.
Frequently asked questions about off-market purchases
What is an "off-market" company?
It is a business that sells without going through an official intermediary or an investment bank: the purchase takes place directly between the seller and the buyer, without a formalised sale process.
What are the advantages of buying off-market?
A direct relationship with the seller, more flexible timing, less competition between buyers and the possibility to negotiate without the influence of an adviser defending the seller's interests.
Passive or proactive approach: which to choose?
It depends on the quantity and suitability of the files received, and on the place of external growth in your strategy. The passive one gives quick access to targets already for sale; the proactive one allows precise targeting, at the risk of contacting companies with little motivation.
Why work with a buy-side investment bank?
To save time (pre-selection and enrichment of targets), approach companies anonymously without harming the relationship, and access market statistics and ratios to analyse and anticipate.
Identify your off-market targets
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