Who buys your business decides what it sells for, and what the process feels like.
A trade buyer in your sector, a private equity backed consolidator and an individual buying themselves a job will value the same company differently and want different things from you afterwards. One may need you to stay for two years. Another may not want you at all.
Here are the main types of buyer, and how to tell a serious one from a time waster.
1. Financial buyers
This acquirer profile is one of the most frequently encountered but it is also rather broad, including entities ranging from private equity investors and venture capital groups through to private wealth management companies operating on behalf of the super-rich.
As the name of this profile suggests, buyers that fall within this category are strongly focused on buying businesses that will offer them a robust financial return in coming years. Common traits of this kind of acquirer may include:
- A preference for SMEs, typically those with a solid management team in place who can continue to run the company following the owner’s exit.
- The capability to buy a business outright.
- An experienced, sophisticated and professional approach to the M&A process. This can be both a pro and a con of dealing with this kind of buyer, as they can negotiate more favourable terms for themselves, which could place inexperienced owners at a disadvantage.
- A tendency to prioritise acquisition targets that can demonstrate a continuous growth trajectory, as they want to maximise their chances of turning a profit, rather than taking a chance on a business with ‘potential’.
- Concentrating on financial statements and, particularly, your company’s historic and current EBITDA.
In short, if you are considering selling to this type of buyer at some point, then it’s important to prepare your financial statements and try to maintain a solid EBITDA in the months preceding the sale.
It’s also worth focusing on hiring or maintaining a robust management team who can ensure a smooth and straightforward transition to new ownership – although this should probably be a priority regardless of the buyer profile you’re interested in!
2. Individual buyers
As the name suggests, an individual buyer is just one person (rather than a group or firm) who wants to acquire a business that can bring them several specific benefits. Individual buyers may be someone keen to own their first company but who doesn’t want the initial risks of setting one up from scratch; alternatively, they could be someone who has recently retired from ownership of a business and wants a new challenge to sink their teeth into.
Whatever the reasons behind their desire to purchase, individual buyers have some unique pros and cons that sellers need to be aware of.
On the one hand, an individual buyer may be less suave and money-minded than a financial buyer, with the potential to take an ‘emotional’ approach to buying as well as a purely corporate one. However, because they are pursuing specific goals – and because they probably have much less experience of the acquisition process – they can also be harder to pin down than financial buyers, who have plenty of expertise. This can make negotiations potentially more difficult or long-winded.
If you would prefer this kind of buyer, however, then it’s important to recognise that individuals tend to favour smaller businesses with relatively low risk and a strong team of managers and staff in place. This will give them more confidence to proceed with a transaction as they will know that there is a good chance of a smooth transition and continuing growth in the years to come.
If your business fits this description, and if you’re looking for a sale with a more personal touch, then an individual acquirer may be the perfect ‘match’.
3. Strategic buyers
Finally, there are strategic buyers. As the name suggests, this buyer profile is interested in acquisitions that align with their corporate strategy, and which can unlock desirable synergies.
As a result, they tend to be established, profitable companies which occupy the same – or similar – market segments to their acquisition targets. They could even be your closest competition, or perhaps a supplier you’ve done business with for years.
Perhaps unsurprisingly, there can be significant benefits to selling to a strategic buyer. For one thing, they will be less focused on your bottom line and more focused on other aspects of your company, such as your customer base, market share, or a USP your business has which they’d like to acquire. As a result, there is the possibility that they will be happy to pay more for your business than a private equity group, as they will have a more nuanced understanding of the value of your company.
On the downside, you may have some serious concerns about selling to a business within your market segment – for instance, perhaps you’re worried about news getting out about the sale, or maybe you have qualms about the direction in which they’ll take your business once they’ve bought it. Consequently, selling to an acquirer so ‘close to home’ may not be the right option for you.
How to vet interested parties
Now you have a solid understanding of the most common buyer profiles, you can market your business to meet their specific requirements. You should also have an accurate valuation carried out of your business, to ensure you’re offering a fair price – one that offers a suitable ROI for both you and your buyer.
Once you have done this and you have some potential buyers approaching you, you can then begin the crucial process of verifying the interested parties to find the ideal ‘fit’.
But how do you go about this?
In short, don’t be afraid to ask questions! Whether you’re dealing with a private wealth management firm, a competitor, or an interested individual, you shouldn’t be afraid to query them on various aspects of the proposed deal.
After all, you will be entrusting them with your business, so you need to be sure they are well-equipped and capable of taking it on and running it well once you’ve left.
Some potential questions to consider include:
- How do you intend to pay for the business?
- What specific requirements do you have for an acquisition target?
- What is your ideal timeframe for the sale?
- What goals do you have in mind with the purchase of this company?
These are just a few of the crucial queries you can put to your interested buyers to verify their suitability going forward.
Once you have weeded out any acquirers you deem to be a poor match, you can then proceed to the next stage of the acquisition process and start negotiating heads of terms.
Why hire a business broker
As you can see, the process of selling a business can be rather lengthy and time-consuming, with a lot of factors to consider – and that’s before you’ve even handed out NDAs and started negotiating!
That’s why it may be in your best interests to hire a business broker to take over the sale and manage it on your behalf. You will still be involved at every stage of the process, but your business broker will be able to mediate and carry out various vital tasks on your behalf – from verifying buyer suitability to preparing NDAs and marketing your business.
With in-depth expertise and a vast network of contacts to draw upon, business brokers can transform a business sale from a stressful and daunting undertaking to a smooth and streamlined transaction for everyone concerned.
Harris Acquire – at your side every step of the way
If you’re planning on selling your company and you’re worried about finding the perfect buyer – or, indeed, any other aspect of the M&A process – why not get in touch with a member of our team?
We offer a comprehensive range of services for both buyers and sellers, helping to secure a straightforward and optimal deal with minimal hassle along the way.
To find out more about how we can help, don’t hesitate to give us a call on 01926 757100 or send an email to Hello@harrisacquire.com.
Your own management team is a buyer too. If that route appeals, read the tax implications of a management buyout before you start.
If the management team route appeals, an employee ownership trust sits nearby. Start with how employee ownership trust tax works.
