What type of Buyer would be interested in my business?

The second most common question that we are asked by business owners is “what type of Buyer would be interested in my business?”  Note: The most common question is “what do you think my business is worth?” and requires a comprehensive valuation to give a proper answer.

Relating to Buyer types, we advise clients do not try to predict or visualize the perfect Buyer for their business.  We do this for two reasons.  First, after 20 years of providing M&A advice to business owners, there are no perfect Buyers, just like there are no perfect businesses.  It is about matching up Buyers and sellers, based upon their core attributes and motivations, which we do every day.  Second, we do not want to set an expectation or limit the marketing potential of a business by targeting only one Buyer group.  When a business is marketed, always in a confidential non-disclosing manner, the goal is to cast a broad net to capture as many interested parties as possible and then qualify them before providing detailed information.

If you Google “Buyer types for businesses” you will see a myriad of types and classifications.  While some of these are potential Buyers for small/mid size businesses, many are not a good fit for a variety of reasons.  Fit can include items such as motivation to complete a transaction, urgency, business size, financial investment, industry knowledge and emotion.  In the most simplistic terms, there are three types of Buyers in the market today for small/mid-size businesses. All are very aware of current market conditions, and each has very specific goals.

First, Private Equity/Joint Venture – This is a group of Buyers that are funded by individuals with the goal of acquiring or investing in businesses for very specific purposes.  This buying group does extensive homework on the company, industry or segment they are looking to invest in and as a result are very focused on achieving specific objectives.  Private Equity is particularly interested in businesses that have high growth potential, scalability and clear financial targets.  We have seen activity in the Private Equity space over the last few years where they are “rolling up” specific industries with the goal of reducing overhead and improving growth to maximize profitability.  They can help companies grow faster by investing more financial and human capital than the current ownership and will play an active role in the strategic operating plan as well as key financial decisions.  They may also ask the existing owner to stay in place for an extended period (i.e. 3-5 years) as part of the purchase agreement.  Often times, after improving the financial results, they will exit the business via a sale after several years.

Secondly, Companies in the vertical or horizontal space – This is a fairly broad category as there are multiple motivations for one company to look at acquiring another.  The most basic case, Company A from a certain industry is looking to acquire Company B in the same industry.  Company A could be a competitor in the same market or from another market that is targeting Company B’s market and has determined it is more effective to acquire an existing company vs. starting up a new location.  Another example is where Company C is looking at Company B as a viable channel to sell Company C’s products or services to or vice versa.  In this case, the two companies are coming together to offer a broader range of products and services in either the same or different geographies.  Or it might be a company that is trying to expand vertically in a value-added change – up or down. In our experience, the buying company has done extensive research on selling a company, and is familiar with the industry, typically reducing any “ramp up” of knowledge during the business valuation and Due Diligence process.  Ultimately, when two companies come together, there will be efficiencies to be gained in areas such as back office, purchasing power, sales horsepower, etc. which increase the overall profitability of the combined organization.

Thirdly, individual private investors – Individual Buyers are typically people who are seeking to buy a business as their means of livelihood – in other words “they are buying their job”.  This is the largest target audience in terms of numbers.  Usually targeting smaller business, they will operate under an “owner operator” model and are looking at this from a long-term opportunity perspective – which is many cases is what the Seller has operated under and often provides the Seller with a reassurance that their business legacy will continue.  Of all the Buyer types, this is the group that is most likely going to be using bank financing.

Regardless of the Buyer type, there are a few general rules of thumb, if a business owner is thinking of selling their business:

• Seek the advice of a professional M&A Advisor early in the process.  This will avoid potholes as you navigate the sale process;
• Budget enough time for the process to occur – it typically takes nine to twelve months for the total transaction process, from valuation through close;
• Have a formal Fair Market Valuation of the business performed before the business is marketed. This will determine what is possible, maximize the potential price and allows tax planning;
• Chose an advisor that markets to the broadest extent possible – across all Buyer groups as you do not know what will ultimately motivate the Buyer to choose your business to explore; avoid so-called “industry specific” advisors;
• Have all potential Buyers prequalified financially (no need to go any further if they can’t afford the business) and
• Ensure confidentiality is maintained from day 1 and all potential Buyers sign an NDA.

In summary, there are different types of buyers that may be interested in a business for a variety of reasons.  As long as the owner has proper representation, the business is properly priced and marketed to the right audiences; it should generate potential buyers and result in a sale.