How do you determine the buyer or category of buyer that will lead to a successful sale of your business? Is your potential buyer likely to be a strategic buyer, a financial buyer, or a related buyer?
Strategic Buyers are generally competitors, vendors, customers, or companies in a related industry. Consequently, they may have connections to your industry and may realize various synergies in acquiring your company. These synergies may enable them to pay a higher price than other buyers.
Determining the right kind of strategic buyer helps you plan on the kind of improvements needed to attract them. Strategic buyers differ from each other. They may be interested in expanding geographically, adding new product lines, acquiring better systems, or perhaps scalability, i.e., realizing better bottom-line results by virtue of increased production and revenue with a smaller increase in facilities and cost. The most successful acquisition, or merger, results when your strengths are compatible with the buyer’s objectives. Being aware of this phenomenon helps you when determining which prospective buyers you want to work with. They may only be interested in the part of your business that meets their strategic goals.
Financial Buyers are often private equity organizations. They acquire companies that are likely to grow and become more valuable over time, and these buyers become involved in the business to help promote that growth. If a private equity company owns companies in or related to your industry, it may also be in a position to realize certain synergies. So, they may offer some of the same advantages as strategic buyers. Moreover, there are currently many private equity companies chasing a limited number of opportunities, which may also make their offering prices more attractive.
A negative is that private equity groups have short time frames for reaching their goals (typically a sale of the business in a few years), and this may cause disruption of business operations and a negative impact on employees and management.
Another downside of dealing with a private equity company may be that they generally are interested only in sellers that can generate substantial bottom lines, usually in the area of more than $2 million a year.
If you are thinking of dealing with financial buyers, you should be aware of the importance of demonstrating strong growth and cash flow. And you must be able to demonstrate that you have a strong management team in addition to top management.
Sometimes private equity buyers, and other financial buyers may acquire less than 100 percent of the company. This gives the sellers, if they continue to manage the company, the opportunity to participate in future growth Sometimes this future participation can result in a larger payment to the sellers than the initial investment.
Related Buyers may be part of the management team, relatives, etc. These buyers might be financed by a private equity group, or a bank, or as is often the case, by you. Banks are usually unwilling to finance the entire transaction and it is quite likely that you will get a smaller up-front payment when selling to a related buyer.
But selling to the management team may also be the easiest and least disruptive kind of transition to a new owner. The process may also be long-term. If you are planning to do this you will have to invest in building your management team. There are of course many reasons to build a strong management team regardless of whether or to whom you plan to sell the business. But it is critical that if you are selling to your management team and you are financing part of the purchase price, you will need strong management that you can rely on to pay the entire purchase price.
This blog post deals only with the highlights of finding the right buyer. We can provide more detailed information. If you are interested in learning more, call (585) 279-0120.
