This was written for and originally published by https://soundmarkwealth.com/, a Kirkland, WA wealth management firm.
Somewhere over the rainbow… is the successful sale and exit of your business. But who will buy it? What will make them want to pay more? Should I really worry about these things because it’s such a great company?
Let’s cut to the chase. Almost all buyers are going to look at multiple companies, anywhere from a handful to a few dozen. They compare, contrast, look for opportunity, a fair deal, and, above all, are skeptical by nature (all you have to do is look at the online ads and see the platitudes heaped upon businesses that are losing money). So, you have to be ready, and you have to be ready for your logical buyer.
Types of Buyers
There are two classes of business buyers, strategic and financial. Financial buyers tend to want a return on investment based on the current operations. Strategic buyers often look at synergies, reduced overhead, etc. to boost the return.
Within those classes there are seven types of business buyers; although each type has its unique features, there is some overlap:
- Individuals (or partners)
- Search funds
- Family and/or management team (different but similar characteristics)
- Small business owners (growth by acquisition)
- Large companies (strategic buyers)
- Private equity groups
- Family offices and fund-less sponsors
Most of the above are self-explanatory but you may not be familiar with some of the buyer types, so I’ll explain a few. Search fund buyers are (usually) individuals who want to buy a larger business than they can afford on their own. They work with investors, who fund their search, i.e. a salary while looking for a business, in return for the opportunity to invest in the deal. This is quite popular and is now taught in numerous MBA programs.
Family offices are very wealthy families that often want to diversify their holdings by purchasing operating companies. Fundless sponsor buyers are a cross between private equity and search fund buyers as they find the deal, then raise the money, often from family offices and private equity (these funding sources are quasi-financial buyers as they often want a return based on performance, not synergies with their current operation).
Financial buyers tend to be individuals, family, management, small-business owners, and sometimes search funds. They tend to be interested in:
- A fair-market salary for the job of company president.
- Scalability—most buyers want a business they can work on versus work in.
- Profits in addition to salary—this is how the buyer will pay off acquisition debt, fund growth, and cover any hiccups to the business.
- Not only income, but also net-worth increase (like you have achieved through business ownership)—every payment they make on the acquisition debt increases their personal net worth because those payments come from the profit the business generates.
- A deal structure that allows them to make a down payment from their personal funds (this can include the help of friends and family) with the rest of the price covered by a bank loan and/or seller financing.
- A business that is salable in the future—something they feel can be grown, in an industry that has a future, and is attractive to buyers.
- Manageable risk—people who buy businesses are usually more risk-averse than people who start businesses.
Financial buyers who are individuals, small business owners, family, or management typically make acquisitions up to about $10 million, with the majority of the deals at $6 million or less.
A friend was selling his profitable business. He told me there were three potential buyers, including one strategic buyer and one pure financial buyer. The financial buyer made the best offer!
Just because a company is seen as a strategic buyer doesn’t mean it will automatically pay more. I recently was involved in negotiations for a large industry player to buy a “small” business in the same industry. The buyer’s starting point for pricing was the value of the assets. Like with my friend’s situation, strategic buyers are just not throwing money around.
Part two will cover strategic buyers.