You must be able to answer one question before beginning the process of selling your business: What type of sale are you looking for? This answer helps you figure out what kind of buyer you need. Then, you can determine what aspects of your business that type of buyer will find attractive.
It’s imperative that you identify who your buyer will be and know their buying criteria. It’s also crucial to understand the different types of buyers. Most buyers look at many characteristics of the business they’re interested in. Some will purchase an underperforming business with multiple problems— most will not.
The Five Types of Buyers and What They Want
You have your reasons for putting your business up for sale, and buyers have their reasons for purchasing it. Knowing who’s most likely to buy your business can save you a lot of time and effort. Your mergers & acquisitions (M&A) advisor can help you pinpoint this group of buyers. Your M&A advisor can also help you create a plan to build your business that suits your specific type of buyer’s purchase criteria. You greatly increase the likelihood of selling at your desired price when you’re able to structure your business to appeal to a specific buyer.
First-time buyers often want to get out of corporate America, but earn the same amount of income (or more) by working for themselves. However, they usually don’t know how to evaluate whether a business is operating on all six cylinders (or the six Ps: people, product, process, proprietary, patrons, and profit). They’re also unaware of the intricate details of buying a business, and may even look to use their retirement funds to make a tax-free down payment.
With their funds on the line, first-time buyers won’t pull the trigger unless they feel safe and confident that they’re making a good decision. Instead, they prefer to work with an advisor or business broker who can provide peace of mind by eliminating fears, protecting their interests, and helping them navigate the buying process.
Sophisticated buyers have usually bought, started, and run their own businesses. They can tell when a business is making money and when a seller is trying to pull the wool over their eyes. They know what they want, so they’re quick to pull the trigger. Sophisticated buyers also understand that M&A advisors are the best way to find properly vetted businesses that meet their buying criteria.
Competitors and Strategic Buyers
Competitors and strategic buyers typically purchase businesses that are in the same or a similar industry as the one they’re already in. Strategic buyers look to add additional profit centers, create congruent revenue streams, or solve a problem.
Competitors and strategic buyers take advantage of the economy of scale, meaning they evaluate businesses differently than other buyers do. They look at how they can decrease overhead by streamlining operations and better fulfill the demands of their existing clients. They also acquire businesses to roll into their current portfolio in order to go public or sell their entire company for millions (or billions) of dollars.
These buyers are knowledgeable and know exactly what they’re looking for. They will also solicit the assistance of M&A advisors or business brokers to help them locate businesses that meet their needs and buying criteria. Some of them buy 70 to 80 percent of a business, leaving 20 to 30 percent of the ownership with the previous owner to keep him or her there.
Private Equity Buyers
Private equity buyers either have funding in place or disposable income, so they move fast. They look at quite a few deals before they find one that matches their criteria, and most won’t buy a business that doesn’t have a management team in place. PEGs (private equity groups) include opportunistic investors who look for businesses that need recapitalization, leveraged build-ups, management buyouts, or innovation.
Turnaround specialists search for businesses that are doing poorly, as well as ones that others overlook and undervalue. They fix what’s wrong and transform them into profit-generating businesses. They often then sell the renovated company.
Understanding Different Potential Buyers
If you’re an expert in your field, you most likely already know who some of your potential buyers may be:
- It may be a competitor in your area that wants a greater market share
- It may be a competitor in a different location that wants to move into your territory
- It may be a business in a related industry that wants to expand their business into your industry
When reviewing potential buyers, you should also consider whether they’re interested in your ongoing operations (keeping your business operating after the sale and retaining most of your employees) or if they may want to absorb your operations into their own.
For instance, a local competitor may want to absorb your operations, while a competitor from out of state would want to keep your business operating, creating a footprint for them in your market.
Understanding the goals of any potential buyers can also help you present your business in the best light. Sophisticated buyers look for a synergistic value-add—some resource that your business needs—that they can supply to multiply (or significantly increase) the valuation of your company after they purchase it.
The synergistic value-add is often capital, but sometimes includes manufacturing capacity, distribution channels, and know-how if they facilitate more efficient or more cost-effective operations. Knowing the buyer’s intentions will allow you to emphasize the advantages your business will provide them.
Understanding your potential buyer’s intentions may also indicate whether they want to buy your business outright (stock or entity purchase) or if they want to buy the assets of your business (where you still own the entity, as well as any liabilities and debts). If you need to pay off liabilities and debts, you will need a higher price to net the same profit from selling your stock or entity outright.
Putting This Information to Use
Clearly, there are many options available to meet your goals for a sales price. However, you need to decide what kind of buyer and sale you want first.
If your goal is to cash out by selling all (or part) of your business, timing and planning are critical. Without taking those factors into account, you run the risk of your organization becoming a distressed business, meaning it isn’t sellable at all.
Selling your business when your profits are on the rise gives you a much stronger position than when it’s suffering. In that same vein, if you are about to introduce a new profit center or new process that will create a much higher profit margin, you may want to wait until you can show its positive impact to your bottom line. This will increase the value of your business and make it more attractive to buyers interested in strong profits.
We once counseled a client in the cement business to wait until they employed a new process for increasing productivity, as well as securing new permits that would allow him to mine materials to a depth of up to 100 feet (instead of the 40 feet he currently had permits for). Both moves would generate improved profitability and higher reserves—increased valuation—for his business. By waiting six more months, he was able to increase his company’s valuation by millions of dollars.
Timing is everything!
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