Helping Clients Find the Right Buyers for Their Businesses

How do you help your clients determine the buyer or category of buyer that will lead to a successful sale of the business?

Is the potential buyer likely to be a strategic buyer, a financial buyer, or a related buyer?

Strategic Buyers are generally competitors, vendors, customers, or companies in a related industry. Consequently they may have connections to your client’s industry and may realize various synergies in acquiring the company. These synergies may enable them to pay a higher price than other buyers.

Determining the right kind of strategic buyer helps you plan on the kind of improvements needed to attract them. Strategic buyers differ from each other. They may be interested in expanding geographically, adding new product lines, acquiring better systems, or perhaps scalability — that is, realizing better bottom line results by virtue of increased production and revenue with a smaller increase in facilities and cost. The most successful acquisition, or merger, results when the company’s strengths are compatible with the buyer’s objectives. Being aware of this phenomenon helps when determining which prospective buyers to work with.

They may only be interested in the part of the business that meets their strategic goals.

Financial Buyers are often private equity firms. They acquire companies that are likely to grow and become more valuable over time, and these buyers become involved in the business to help promote that growth. If a private equity firm owns companies in or related to your client’s industry, it may also be in a position to realize certain synergies. So it may offer some of the same advantages as strategic buyers. Moreover, there are currently many private equity firms chasing a limited number of opportunities, which may also make their offering prices more attractive.

A negative is that private equity firms have short time frames for reaching their goals (typically a sale of the business in a few years), and this may disrupt business operations and have a negative impact on employees and management.

Another downside of dealing with a private equity firm is that they’re generally interested only in sellers that can generate substantial bottom lines, usually in the area of more than $2 million a year.

If you’re thinking of dealing with financial buyers, be aware of the importance of demonstrating 1) strong growth and cash flow, and 2) a strong management team in addition to top management.

Sometimes private equity or other financial buyers acquire less than 100 percent of the company. This gives the sellers, if they continue to manage the company, the opportunity to participate in future growth Sometimes this future participation can result in a larger payment to the sellers than the initial investment.

Related Buyers may be part of the management team, family members, etc. These buyers may be financed by a private equity firm, by a bank, or, as is often the case, by the seller. Banks are usually unwilling to finance the entire transaction and it is quite likely that the seller will get a smaller up-front payment when selling to a related buyer.

But selling to the management team may also be the easiest and least disruptive kind of transition to a new owner. The process may also be long-term. If your client is planning to do this it will have to invest in building the management team. There are of course many reasons to build a strong management team regardless of whether or to whom the business may be sold. But if the sale is to the management team and the seller is financing part of the purchase price, it’s critical to have team the seller can rely on to pay the entire purchase price.

This article deals only with the highlights of finding the right buyer. We can provide more detailed information. If you are interested in learning more contact us at 888 406-0088 or [email protected]. A 24-minute video is available that you can show or send to your clients.

This article is also available in the form of a blog post that you can, with our permission and payment of a small charge, include as part of your blog postings.