Business Owners: Know Your Buyer!
Business owners! Do you know your buyer? Most business owners who read this are probably not thinking of selling their business – at least at the moment. But the time will come because, as we say around here, “Every business that doesn’t fail will eventually change hands!”
Types of Buyers
Aside from an intergenerational transfer in which the owner’s children or other next generation members inherit or buy the business – or one or more employees buy it – there are two primary types of buyers in the mergers and acquisitions (M&A) marketplace: strategic and financial. Strategic buyers are generally other businesses that operate in the same or a related industry. This might be a competitor, a supplier, or even a customer of the business being sold.
Synergies

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Family offices and high net worth individuals, on the other hand, are generally interested in the revenue stream of the acquisition and the likelihood that such revenue stream will continue and grow over a longer period of time. Unlike PEGs, they are usually – but not always – less interested in synergies. Family offices and high net worth individuals are, in our experience, more conservative than are PEGsValuations
Strategic buyers typically pay more for the business because they look at how bringing the target company into the fold can improve performance and generate efficiencies. Significantly, by combining the companies’ operations, they can eliminate many administrative costs in one or the other entities in areas such as HR, finance, accounting, sales and IT functions thus reducing operating expenses. Except in situations where a private equity firm already has a company in their portfolio that is similar to the target company, financial buyers do not usually gain synergies as a result of the acquisition. Their only motivation is the ROI from a single company, so they are therefore reluctant to pay a premium based on future earnings. When calculating value of a target company, financial buyers rely on the company’s historical earnings or EBITDA. Assuming the targeted business is not in a declining industry, financial buyers will use an earnings multiple prevalent in the target company’s industry and the company’s past growth rate, as well as the buyer’s target rate of return to calculate the company’s value before tendering an offer.Closing Capability

The Bottom Line
From the standpoint of the sellers, attaining the best outcome when selling a business requires the business owner(s) to determine what that specific outcome is. Does the exit strategy call for a certain amount of money as proceeds from the sale? Because the sale of a business is often a retirement event, sellers must have some idea of the amount of money they’ll need in retirement. If the sellers plans to spend their retirement years carving model boats in the garage, that’s one thing. On the other hand, if the sellers plans to travel around the world competing with The Big Dog, that requires an entirely different size bank account. There are other issues. Does the seller’s specific outcome call for a specific time table by which to close the deal? Does the owner want a sudden and clean break – to walk away after closing – or will the owner entertain staying on with the business for a couple of years? These are among the many questions that an owner must answer before being able to describe the type of buyer that would be most likely to allow the sellers to reach their goal. Like anything else, if you know what you’re looking for, you’ll be much more likely to find it.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week!
Joe

The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at joe@WorldwideBusinessBlog.com