There are three types of buyers for your business. Understanding the motivations of each potential buyer is extremely important in determining how you prepare your business for the ultimate goal, which is to make it marketable to the largest pool of buyers and to sell it for the most money.
The three most common types of buyers are Industry Buyers, Strategic Buyers, and Individual Buyers. In each case, buyers have their own unique interests and motivations that directly affect you as the seller.
Industry Buyers. An industry buyer is someone in the same line of business as you. The size of the company does not matter. You can have two businesses in the same industry and one can be 10 times the size of your business, but both companies can have similar products, similar services, and similar customers.
Here’s why: The largest, most valuable asset that most businesses have is their goodwill – not the fixtures, furniture, or equipment. Goodwill is the reputation or know-how that has been built over a number of years. If a potential buyer has worked in the same industry for an extended period of time, understands what customers want, knows how to manage vendors, knows how to market the products or services, and possesses the necessary technical expertise, this person will not pay much or anything for goodwill. When you try to sell to someone who has been in the industry for years, your goodwill is worth very little, or possibly nothing.
Industry buyers tend to make the lowest offers for businesses on the market. Often, industry buyers are willing to offer only pennies on the dollar of the true value. These buyers should be your last resort because your goal is to make your business attractive to the largest pool of buyers and sell it at the highest possible price.
Strategic Buyers. Such buyers can be either smaller or larger than the company they are interested in acquiring and can be either publicly owned or privately owned. They may be looking to move into a new geographical market, to boost earnings, or to reduce overhead by combining similar administrative or production functions. A strategic buyer could also be a vendor hoping to protect a valuable account.
Strategic buyers do not overpay, as some people think; it is just that by eliminating or combining businesses, the new entity makes more money under their ownership than under yours. Thus, they are willing to pay a higher amount to achieve those synergies. Only a small percentage of businesses are sold to strategic buyers.
One important sub-category of strategic buyers is a private equity group (PEG). These are firms that acquire businesses in certain industries, either brings in new management or else partner with existing management, infuse capital into the business, and then attempt to grow the company to realize a return on their investment. This can be a good option if your company matches the exact criteria of the private equity group. However, most PEGs target companies that generate profits of at least $2 million a year. And it has to be an exact match; generally, only a small percentage of companies fit their profile.
But what if your business doesn’t fit into any of those categories? What options are left?
Actually, most businesses are not sold to either industry or strategic buyers. Rather, the largest pool of buyers is the individual who is willing to pay for goodwill and for your experience.
Individual Buyers. The individual buyer will bring general management, sales/marketing, and financial experience to the business. Typically, many individual buyers are what we call corporate refugees – people who are fed up with working for someone else and who want to achieve the American Dream of owning their own business, controlling their own destiny, and keeping the profits for themselves and their families.
Most people in this class are first-time buyers, tired of working for someone else. Maybe they were downsized from their current job, did not want to relocate, were passed up for that big promotion or just got burnt out by the politics at their current company. Surprisingly, most of these buyers do not know what type of business they want.
You might be surprised to know that most business buyers have no specific experience in the industry into which they are entering. Instead, they are looking to apply their general business management, marketing, and financial skills to your (or their new) industry.
These individual buyers are the largest pool of potential buyers and they are looking for three things when evaluating a business: the organizational structure of the business, its growth potential, and the terms of the transaction.
If you need help putting together a strategic plan, please contact the Benjamin Ross Group to speak with a business broker who can help you start the process.