Our experience over the past 30 years tells us that there are 7 types of buyers for most businesses .
The primary questions that you, the seller of a business, needs to answer are:
Which buyer is right for you?
Who will give you the most total value for the sale of your business ?
Below is a list of the 7 types of business buyers. Click on them to reveal their characteristics; and some areas of caution.
Add, diversify, or expand into a new business
Expand geographically or looking for synergistic fit (products & services)
Consolidation of functions typical (accounting, purchasing, human resources, etc.)
Owner may not be required to stay unless “Earn-out Deal Structure.”
Caution: Anticipate some of your people will be made redundant
Looking for consistent or higher earnings – increased earnings per share if buyer is a public company
Looking for growth opportunities and possible add-on acquisitions
Exit strategy – sell company or take public
Management Team expected to stay – few if any people made redundant. Owner can exit after earn out if management team is strong.
Caution: Looking at pure economics of the deal
Private Investment Groups – Equity Funds
Looking for synergistic fit with their portfolio companies if target company meets their investment criteria (revenues, EBITDA, etc.)
Looking for new “Platform Company” for eventual add-on acquisitions
Transaction will typically be a “recapitalization.” 70% to 80% equity in company with upside 3 to 5 years out through an IPO or sale
Not interested in day-to-day operations
Will provide strategic direction at the Board level
Caution: Requires strong management team in place
Typically use the IPO “roll-up” as a strategy and then add-on acquisitions
Could be an equity group or a dominate company in the industry
The question – is bigger better if you are in the same geographic area with the other companies in the “Roll-up”; and have very little synergy with the other companies?
Owner/sellers can anticipate a small amount of money upfront with company (buyer’s public) stock as major percentage of purchase price
Not an exit strategy unless a strong management team in place
Caution: Most IPO “roll-ups” in the 1990’s performed poorly
Caution: Typically 144 Restricted Stock and may have to wait in a long line to sell stock
Could be a good alternative if he has significant cash for down payment and company lacks a strong management team
Evaluate his entrepreneurial skills vs. big company mentality. He may not be a “Hands On” person if this is needed
Consider a “Phased” transaction
Buys percentage of equity to learn business with option to buy remainder of shares
Caution: Avoid risk of taking note and substantial earn-out paid out of profits. You could get the company back
Management & Employees
Could be a good deal if a LBO-Leveraged ESOP (Employee Stock Ownership Plan) strategy is used
Don’t waste time or share financial and confidential information until they “HAVE” a commitment to finance the transaction – not “IF” they can arrange the financing
Caution: If leveraged ESOP is used, be prepared to pledge your proceeds from the sale (QRP) as collateral for their loan
Can typically expect consolidation of functions and people made redundant
Caution: Confidentiality extremely important in discussions – avoid word “Leaking” on street that you are for sale or in trouble – negative impact with customers
Caution: Competitor has valuable information if deal does not close (customer list, pricing strategies, etc.)
Caution: May not maximize value compared to other buyers