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What Type Of Buyer Is Right For Your Business?

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When it comes time to sell your business, it will be important and helpful to understand the type of business buyers you will encounter. The different types of business buyers have varying objectives and strategies, and therefore will have different advantages and disadvantages from the perspective of the seller. This article identifies the three basic types of buyers and summarizes the fundamental advantages and disadvantages to the seller.

 

In general, business buyers can be separated into the following three basic categories.

 

·        Strategic or Industry Buyers

·        Private Equity Groups

·        Individual Investors

 

Strategic/Industry Buyers

Strategic buyers are generally characterized as existing companies, either public or private, that are looking to acquire complimentary businesses that will add both financial and strategic value to the acquiring company. Typically, an existing business will acquire another company to obtain key patents or licensing rights, quickly gain access to new customers, expand into new markets, improve operating margins, obtain key intellectual property, etc. Most strategic buyers focus on companies with a proven track record with stable revenues and income. However, there are also strategic buyers that focus strictly on turnaround opportunities where the acquisition candidate is a struggling company with limited resources and cash flow. Strategic buyers may purchase businesses with earnings ranging from $100,000 and up, depending on the size of the acquiring company. Generally, the acquiring company is a minimum of three times larger than the target company.

 

Strategic buyers tend to be more conservative and disciplined in their approach to valuing and acquiring companies but also consider the opportunity value to improve sales and operating margins. Strategic buyers experience with acquisitions usually helps facilitate the acquisition process because they are comfortable with a variety of deal structures and financing options, and they have resources available to support the due diligence and closing process. Although a strategic buyer should be willing to pay some premium because of the potential synergies and strategic value created from the merger/acquisition, they are often very tough negotiators and even a fair market value can be difficult to obtain for a seller.

 

The primary disadvantages of dealing with strategic buyers usually involve loss of employees as a result of consolidation and the likely loss of the acquired company’s corporate culture.

 

Private Equity Groups

Private equity groups (PEGs) are legal entities that have a management team representing a group of investors for the purpose of managing portfolio businesses and acquiring private, closely held businesses.   PEGs come in many flavors depending on their acquisition goals and strategies. Most PEGs focus on specific industries, although it is not uncommon for PEGs to focus on two or three different industries. Some PEGs do not limit their investments by industry and instead are looking for companies that meet their investor’s criteria for growth and return-on-investment. In general, PEGs are trying to acquire companies that offer some synergy or strategic value to compliment their other portfolio businesses. PEGs are generally buyers of large and middle market companies but in recent years many PEGs have also formed specifically to focus on lower middle market businesses with earnings of $500,000 or more.

 

Advantages of PEGs is that they are very experienced at the acquisition process, usually have access to many sources of financing, will usually want management to stay with the new company for an extended period and are less likely to change to the corporate culture of the acquired company.

 

Disadvantages of PEGs to a seller are that they are very sophisticated buyers and will generally not pay a premium for a business and it is not uncommon that the company will be sold again in approximately five years.

 

Individual Investors

Individual investors come in two basic categories; high net worth investors and individual buyers. The high net worth investor is usually looking at lower middle market businesses with earnings of $100,000 or more where management will stay in place. Conversely, the typical individual investor is an entrepreneur that is basically buying a job with aspirations of creating wealth and growing a successful business to support a family. The individual investor is often looking to replace the existing owner, generally has limited access to funds for a down payment and is seeking a business priced under $1 million.