The 3 Types of Buyers Who Invest in Businesses

Selling a business is nothing like selling a house. In my neck of the woods, real estate is moving like hotcakes. Our mountains are exactly the safe and peaceful zone of tranquility that currently attracts buyers in droves. A house goes up for sale one day and the deal closes the next, like clockwork.

Wouldn’t it be nice if selling a business were that easy and buyers that plentiful?

The merger and acquisition world is waking up as the shock of the pandemic has softened and we are busy guiding our clients through the selling process.

Selling a business may not be as smooth as selling a house in the mountains, but there are few things you can count on. One is the question “Who do you think will buy my company?”

It always feels like one of my daughters asking me who her husband will be. Who knows, but I do hope he will have capital and commitment!

There are three main categories of buyers who buy privately held businesses.

  1. Financial buyers are investors who are looking for a return on their investment through cash flow and ultimately, a future exit from the platform. Private equity groups and family office groups are the most common financial buyers in the middle market. These financial buyers actively pursue well-positioned businesses in which they can invest capital and provide expertise to grow value through increased cash flow and margin improvement. They often bolt-on smaller companies to a larger company platform with the goal to double, triple, or even quadruple the size over time. Their exit strategy will be to either sell to a larger financial buyer or take the company public. They are interested in how consistent your earnings have been and a well-documented future growth plan.
  • Strategic buyers buy businesses that offer a synergistic fit to their existing operations making the total greater than the sum of the parts. I always describe synergy as “one plus one equals three.” They run in the same race as you do. They are your larger competitors, customers, and vendors. They are motivated by the opportunity to expand more quickly, either into new geographic regions or product lines. They may be searching for customer expansion or increasing their supply chain depth. Perhaps they need to shore up a weakness in one of their core competencies, for example in technology or distribution. A deal with a strategic buyer always comes down to the basic question: is there the opportunity for cost savings, increased revenue, market expansion, economies of scale, or diversification resulting in a reduction of risk? These buyers are long-term investors and pay high premiums for strong synergies.
  • Individual Buyers are people who perhaps have left the corporate world and want to try their hand at owning a business. Often they will say that they want to “control their own schedule,” but don’t tell them that as a business owner, customers and employees will now control their life! Ah, the dream that entrepreneurship means more control. They do, however, have specific expertise from their years of experience. Perhaps they were in the marketing department or head of finance or human resources; or they may specialize in operations or technology. They typically will be related to your industry in some capacity and will wholeheartedly rely on your team. The big question will be, do they have the money to buy your business?

Recognize that beauty is always in the eye of the beholder and all buyers are not created equally. Capital and commitment are the foundation but whether a financial, strategic or individual investor, they will all have their own vision for the future. What is important to you as the seller will ultimately drive which buyer will be most appropriate to achieving your goals. Consider factors that are important to you, such as your intentions to continue working in the business or protecting your employees post-sale. Understanding your exit strategy is the first step to ensuring you find the perfect buyer to protect your legacy.

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