Buy-Side vs Sell-Side

Who’s Involved in Buy-Side and Sell-Side M&A?

Before we dive into the nuances of sell-side vs. buy-side, it’s important to understand who exactly is involved in either side during an M&A process. To break this down, we’ve outlined who is involved on each side.

Buy-Side Players:

• Private equity firms (direct platform investments or portfolio investments)
• Strategic buyers
• Investment banks / M&A Advisors
• Additional transactional third parties (legal, accounting, consulting, etc.)

Sell-Side Players:

• Seller (company)
• Private equity firms (when selling a portfolio company)
• Strategic Buyers (if divesting an asset)
• Investment banks / M&A Advisors
• Additional transactional third parties (legal, accounting, consulting, etc.)

Investment Bank vs. M&A Advisor

Since both an investment bank and / or an M&A advisor can help companies through both sides of the M&A process, how can you tell the differences between the two? What’s important to know?

Investment banks:

• Investment banks typically have a full range of services, including corporate financing advisory, debt financing, private placements, M&A advisory, and more. The large, bulge bracket investment banks are typically household names such as Goldman Sachs, Morgan Stanley, and JPMorgan Chase. M&A is only one aspect of an investment bank’s responsibilities. They typically have general industry coverage across a broad range of industries such as consumer/retail, healthcare, industrials, natural resources, real estate, technology, media, and telecommunications.

M&A advisors:

• Advisors can run the gambit from larger, general advisors to smaller, specialized advisory firms. Rather than focus on all aspects of investment banking or a full spectrum of industries, they tend to focus on one aspect of investment banking (i.e., M&A advisory) for a specific industry. They can work on both buy-side and sell-side transactions.

Now that you’re familiar with who’s involved in the M&A transaction on both sides let’s discuss the nuances between the buy-side vs. sell-side.

Buy-Side in M&A

The buy-side process of an M&A transaction can start in various ways. For example, a strategic acquirer will look for an acquisition because they either have synergies or an opportunity to expand their existing business model with a new company, while a private equity group might be looking for a high-growth company to add to their portfolio.

In either case, buyers are looking for a strategic benefit or return on investment when approaching an M&A process. Buy-side strategic acquirers and investors want to improve the value of their company and fill gaps in operations, product offerings, or geographical locations to complement their existing offerings.

Let’s dive into the definition, roles, and motivations of those on the buy-side portion of an M&A transaction.

Buy-Side Definition

As the name suggests, the buy-side in M&A refers to the companies that intend to buy the other company in the transaction. Recently, nearly 60% of typical buyers of software are private equity-driven deals (private equity direct or PE-backed strategic buyers). To accomplish the transaction, buyers often bring in an investment bank or M&A advisor to help them through the process.

Buy-Side Roles & Responsibilities

What is the role of buy-side companies in an M&A transaction? In other words, what do buy-side companies do during an M&A transaction, and what are they responsible for? This list breaks it down.

Buy-side activities can include the following.

• Finding potential acquisition targets.
• Evaluating target companies with financial modeling and valuation techniques.
• Constructing transaction structures with both the buyer’s and seller’s interests in mind.
• Securing capital to close the deal and managing financing.
• Negotiating terms, price, and objectives in a deal.
• Increasing the value of owned assets and ROI on M&A deals.

Buy-Side Motivations

What motivates companies on the buy-side of M&A? If the buyer is a strategic acquirer, the buyer is motivated to complete an acquisition for various reasons, including improving market share, entering a new market, consolidating the competitive landscape, or enhancing its product offering. Private equity firms seek to invest in and grow a company to either operate it for profit or sell it in the future for a return on investment.

Sell-Side in M&A

Just as with the buy-side, the sell-side of M&A can be accomplished in myriad ways. With a strategic exit strategy in place, sellers can outline exactly what type of buyer may be the best partner for them, as well as what the ultimate outcome will be (selling the company entirely, selling a portion, etc.).

In sell-side cases, business owners and decision-makers are looking for a buyer who will give them the highest price, best terms, and is the best fit for the future of the business.

To explore this further, we’ll explore the definition, roles, and motivations of those on the sell-side portion of an M&A transaction.

Sell-Side Definition

The sell-side of M&A refers to the companies involved in selling a business to a target acquirer. Typically, the seller is the founder or owner of the company. While many different exit strategies can represent a unique set of goals, usually the most important objective is to get the best price, terms, and fit possible. To do this, sellers often engage an investment bank or M&A advisor with prior experience to help them through every step of the process.

Sell-Side Roles & Responsibilities

What is the sell-side advisor responsible for in an M&A transaction? Much of it comes down to preparation for the process, both for engaging potential buyers as well as preparing documents and marketing materials when potential buyers have been identified. This list breaks down some of the sell-side advisor’s responsibilities.

Sell-side activities can include the following.

• Creating competition between potential buyers.
• Negotiating NDA clauses with potential buyers, as well as terms of the deal later on in the process.
• Gathering data and preparing a compelling narrative for the Confidential Information Memorandum (CIM).
• Guiding the seller through due diligence.
• Opening and managing the data room where documents are exchanged.
• Organizing, conducting, and executing management meetings between buyer and seller.
• Maintaining momentum in the transaction until it’s closed.
• Negotiating sale price
• De-risking the deal from the start.

Sell-Side Motivations

Again, the motivations of sell-side advisors and sellers themselves are important to understand when approaching an M&A transaction. Sellers’ motivations come down to finding the right balance between price, terms, timing, and fit. For example, one seller’s exit strategy might be to stay on with the company and keep a portion of ownership, while another seller might sell the company entirely and ride off into the sunset.

Why SEG Is a Sell-Side Only M&A Advisor

Why is it crucial to understand the differences and nuances of the buy-side and sell-side of M&A? Because many investment banks and M&A advisors work for both sides. Sellers who go into an M&A process blind may end up with an advisor who doesn’t always have their best interests at heart.

For example, if an M&A advisor works on both the sell-side and buy-side of M&A, it is possible that mixed buy-side and sell-side relationships could create conflicts of interest. For example, if the advisor represents Seller A on the sell-side but also does work with Buyer B on the buy-side, they may feel the need to cater to Buyer B due to the existing buy-side working relationship — meaning they may not present Seller A with other buyers even if another buyer is a better fit or has a stronger offer in terms or price. In short, they may not drive a competitive process ending in the best outcome for the seller.

It’s a subtle distinction, but one that can be the difference of thousands of dollars, if not millions.

Why SEG Is a Sell-Side Only Firm & Why That Matters

At SEG, we’re a sell-side only M&A advisory firm. The top reason is that it helps us stay unconflicted during deals. We want to represent our clients’ priorities first. No matter the outcome, our position is evidence of that client focus.

We operate in our clients’ best interests only, from start to finish. In fact, we often advise clients to wait if the timing isn’t right or reject a deal that won’t provide their desired outcomes.

This position allows us to maximize the outcomes of our clients. Here are just a few of the many benefits that using a sell-side only advisor has as compared to one who does both.

Sell-side advisors:

• Save time (time kills deals), energy (help you focus on the business while we do the M&A process), and money (we want to prevent you from making costly mistakes)
• Reduce risk by bringing experience to the table that sets you up to avoid common pitfalls and mistakes
• Leverage existing relationships to bring you into the M&A ecosystem, where you’ll find the greatest buyer options
• Bring expertise about software M&A processes that is invaluable to sellers
• Equip you with confidence to know that your advisor is on your side and has no ulterior motives in the transaction besides your best interests

At Software Equity Group, we’re dedicated to providing the maximum outcome for your company by identifying the best financial and strategic buyers. We use our expertise to bring multiple bidders into the picture so you have a competitive advantage. And, we share our industry knowledge for free to help our clients understand the M&A market.

If you need a sell-side M&A partner, reach out to SEG to learn more.