When selling a business, there is no one type of buyer. There are different types. In fact, there are five of them that you will inevitably have to get to know if you want to have that successful transaction. In this episode, Michelle Seiler Tucker gives us insights into these five different buyers, what their behaviors are, and how best to serve them. Tune into this brief yet important discussion to know what to look out for when you’re selling or exiting your business.
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First-Time Buyers
We’re going to talk about the five different types of buyers. Many business owners think there’s one type of buyer, but there’s not. There are five different types. The first type is the first-time buyer. The first-time buyer makes up about 90%, 95% of all buyers. First-time buyers are those buyers who are trying to leave Corporate America and purchase a business so they can have a better quality of life, financial freedom and be their boss. They want to purchase a business. That’s great. I’m all for that. I’ve helped hundreds upon hundreds of first-time buyers acquire the business of their dreams. The problem with first-time buyers is that you have to interview them.
You have to interview them on their strengths, their weaknesses, their passions, why they want to own a business in the first place and why it is huge. If you can’t help them identify why they’ll never pull the trigger and buy a business. When I interview first-time buyers, I ask them everything about what their core competencies are? What are their skillsets? What are their strengths? What are their weaknesses? What have they done for the past decades? What was their passion? What were they excited about when they weren’t working in their job? If money wasn’t an issue, what would they do?
Most importantly I ask my first-time buyers, what is your why? Why do you want to leave your job and buy a business? You have to interview first-time buyers to figure out if they’re serious and if they’re going to pull the trigger and buy a business. You have to financially qualify because a lot of first-time buyers don’t have the money to purchase a business. They think they can go out and get a loan or they can bring in other partners or get venture capital. It’s not easy to do that. Yes, some of them can get a loan, many of them can’t. You’ve got to financially qualify these first-time buyers. They’re very slow to pull the trigger.
When I interviewed my buyers, I interviewed them on why. I’ll give you a story to illustrate this. I had a lady that was in banking for decades. She was about three years away from retiring. She came to me and wanted to buy a restaurant. I started asking her questions, “Why do you want to own a restaurant? Do you have experience in restaurants? Do you have family members that have restaurants?” She said, “No, I’ve been in banking for 30 plus years. I just thought the restaurant industry was easy.” The restaurant industry is anything but easy. It’s one of the most difficult businesses you can be in. I asked her, “Why do you want to own a business?” She said, “My husband contracted Agent Orange and he is dying, but he’s outlived every doctor’s prognosis of how long he’s going to live. When he does pass away, I’m going to lose that income, his benefits, etc. Plus, I have a daughter. I’ve been working for 30 plus years. I don’t have a legacy to leave behind. I don’t have anything for my daughter.”
I asked her how much money do you have to put down on a business? She says, “I have about $350,000.” A $350,000, I want to say $50,000 for working capital. I want to make more than what I’m making now in banking. She was making about $125,000 a year after being in baking for over 30 plus years. Again, she was about three years away from retirement. Her why has to be so strong, so powerful to keep her in the game because if it’s not, guess what she’s going to do? She’s going to listen to all the naysayers. She’s going to listen to all the people who tell her, “You shouldn’t buy a business. What are you crazy? You’re three years away from retirement. You got great benefits. You’re making $130,000 a year, and you’re going to risk all of that?”
Her why was so powerful to keep her in a game. I ended up finding her a flooring company that would agree to seller finance to her with $300,000 down. She kept her $50,000 for working capital. It included real estate. She bought a business plus real estate following a $300,000 down. She’s making after all debt service in the $300,000 to $400,000 range. She pulled the trigger. I held her hand every step of the way. First-time buyers, if you’re looking to exit your business or sell a business, you have to know what buyer is right for your business and what buyer is going to pull the trigger on what buyer’s going to purchase your business. If you’ve listened to my first show on the Seiler Tucker GPS Exit Model, where I teach you how to plan your exit and how to build your business so it’s sellable.
Now we’re talking about the five types of buyers you may or may not want to sell your business to. First-time buyers will buy coffee shops, restaurants, dry cleaners, laundromats, and gift stores. She bought a carpet company. I was able to help her get into that business. She was able to use her retirement funds and redirect it to purchase a business without paying taxes and penalties. That’s a good way for first-time buyers to be able to come up with the money. If you’re selling your business or exiting a business, you don’t want to seller finance, first-time buyers might not be right for you.
Sophisticated Buyers
The next type of buyer is a sophisticated buyer. Sophisticated buyers buy all kinds of different things. I have different sophisticated buyers I work with that have trucking companies, hospitals, construction and all kinds of different things. These are serial entrepreneurs. They are industry-agnostic. They pull the trigger pretty quickly unlike first-time buyers. Some first-time buyers will take 2, 3, 4, 5, 6 years looking at businesses. Whereas sophisticated will make a decision quickly, they know what they want to pay and either the seller will agree to their terms or they won’t. A sophisticated are great buyers. They come to M&A advisors. Why? M&A advisors have the best businesses on the market. Most business owners are going to hire an advisor to sell their business versus trying to sell on their own. Sophisticated is a great buyer if you’re planning an exit. Pull the trigger quickly and they’re all different. Most of them are industry-agnostic. Most of them have different EBITDA requirements.
Competitive And Strategic Buyers
Let’s talk about competitive and strategic buyers. These are great buyers because competitors and strategics buy synergies. When you can find a buyer is going to buy synergies, they’re willing to pay more. They’re willing to pay a higher multiple. An advisor like myself comes in and looks at the business as a whole and see if that business is operating in the Seiler Tucker 6 Ps because if it is, I know what buyers are willing to pay for people. People in your team, your management team, and your employees. I might know which buyer is willing to pay for proprietary, which could be contracts, databases, trademarks, and patents. Competitives and strategics are looking at businesses with synergies, whether it’s a talent team, rather it’s a contract. It’s something that can catapult their business to the next level. These buyers will pay more and they will outbid other types of buyers.
Let me give you a perfect example. We had this service business that we were selling. They had a few patents. We have probably 550 buyers for that particular business. We have found a strategic that had a similar product but different. Our company had 60% of its revenue tied up in VP. That would scare most buyers. Most buyers will be like, “If you lose VP, you lose 60% of your revenues. It could put you out of business.” This company wasn’t afraid of that because this particular company was trying to get their products and services into VP for decades and never could. Buying this business was a strategic buy because they were buying that contract, which was synergistic. They knew they could ROI and monetize with their other products and services. That’s why it’s so imperative to know your strengths, know your piece so that you can package your business correctly and build it to meet as strategic or that competitor’s buying criteria. That’s what we do for our clients.
Private Equity Groups
The next type of buyer is PEGs. I call these Private Equity Groups. They buy different ways. They buy two ways. They buy based on platforms or add-ons. Let’s say a private equity group wants to get into the manufacturing industry and they’re not calling in it in the manufacturing industry. They will look for businesses with an EBITDA, Earnings Before Interest, Taxes, Depreciation and Amortization over $3 million. They typically will never buy a platform under $3 million in EBITDA. They also look at add-ons. Let’s say that they’re already in the food manufacturing business. There’s a hot sauce company for sale. That hostiles company’s EBITDA is $700,000. They will look at that hot sauce company because it’s an add-on to their existing platform. Platforms have to be $3 million up in EBITDA, add-ons can be less. PEGs are great. They pull the trigger.
Turnaround Specialist
To recap, first time buyers are slow to pull the trigger sophisticated as a quick strategic thing, competitors are typically very quick. A lot of times I’ll create a bidding war. Private Equity Groups look at a lot of deals per year. They’re very selective. They’re pretty quick to pull the trigger, but they do look a lot of businesses. There’s a lot of competition that you would be up against. Let’s talk about the last type of buyer turnaround specialist. Turnaround specialists are businesses that are underperforming. They’re buying underperforming assets. Why? Because they have the core competencies, the skill sets, the resources they experience to take these businesses, flip them and sell them for a profit.
Turnaround specialists will buy businesses, very cheap, sometimes no money down. They’ll leverage the assets and turn that business around. You need to look at your business and ask yourself what type of offer is right for my business? What type of buyer? Is it their first time? Are you in a coffee shop industry? Do you have a coffee shop, laundromat, dry cleaners, or if you have a manufacturing business, then you’re going to appeal to the strategics, the competitors and the PEGs? If you have a manufacturing business that’s not doing well, a turnaround specialist might be interested in your company.
Go look at your business and make sure you read the blog where I talk about planning your exit and building your business to meet your specific buyer’s criteria. If you want to sell a $20 million manufacturing company, who buys those strategic, competitors, PEGs? What does revenue have to be? What does the EBITDA have to be? What’s the management team, etc., have to be for that buyer to pull the trigger and buy that $20 million company? These are the five types of buyers. Thank you. Go out there and find your exit too.
Important Links:
- Seiler Tucker GPS Exit Model – Previous episode
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