Understanding the traits common to each buyer category can help sellers level the playing field in a business sale of any size.

In middle-market business sales, the value of the deal and the path to a successful closing are shaped in large part by a factor that many sellers underestimate: the type of buyer that is evaluating your company.

Looking at the more than 1,100 business sales that IBG Business’s M&A professionals have closed dating back to the 1980s, the lion’s share of buyers can be slotted into one of three major categories:

  • Individual buyers, consisting of experienced entrepreneurs, former corporate executives or corporate staffers yearning to work for themselves, and high net worth individuals who seek an opportunity to create wealth
  • Strategic buyers, which often use business acquisitions to achieve synergistic goals (e.g., increase market share, achieve geographic growth, or reduce competition)
  • Financial or “professional” buyers, which are constantly in the market for business acquisitions that will achieve high returns for themselves and/or their investors.

As you prepare your business for sale and embark on one of the most important transactions of your life, being aware of each type of buyer can help you anticipate what a prospect will look for in a deal and how you can respond throughout the sale process.

Following is a profile of each type of buyer and a look at some of their distinguishing characteristics.

INDIVIDUAL BUYERS

Their Traits. Individual buyers are in it for their personal benefit. They may be serial entrepreneurs, retirees from the corporate world, a first-time owner who has had enough of working for someone else (i.e., they are looking for income and freedom), or a recent seller who is looking for his next challenge.

In most cases, individual buyers target smaller, relatively affordable, well-run, low-risk businesses where they can have hands-on ownership. That often makes them welcome prospects for sellers who not only want to sell their company but also want a buyer who is looking for a turn-key operation, will preserve the company’s reputation, grow it into something bigger and better, and take good care of your employees.

Risk – that is, the lack of it – can be a major consideration for individual buyers, because they are either new to business ownership, lacking in capital, or in the second half of their life and don’t want to take unnecessary chances.

Risk can be a consideration for sellers as well, if the buyer is unable or unwilling to pay cash for the business and wants you to carry a portion of the purchase price.

Because they have a personal stake and involvement in the deal, they are the least likely of the three types of buyers to treat the purchase as “just business”; consequently, they are often the least predictable, and they will often require the most attention due to their lack of transaction experience.

Professional Help. In what we would characterize as a “Main Street” deal (as opposed to a deal at higher rungs of the value ladder), you will attract prospective buyers from the full spectrum of sophistication and integrity. An IBG Business M&A professional can help you separate the wheat from the chaff.

On the front end, we will also help you prepare your business for sale, market it to a defined field of prospects, preserve confidentiality, and evaluate buyers and their offers. As the deal progresses, we will serve as a valuable buffer between you and the buyer and guide you through the negotiation and due diligences phases to a successful closing.

STRATEGIC BUYERS

Traits. In contrast to an individual buyer, a strategic buyer is usually an established company that is actively engaged in your industry or a related industry and sees the acquisition of your business as a way to achieve a strategic or synergistic objective.

As two common examples, a strategic buyer might pursue:

  • a competitor, to acquire its customers, market share, or product line, or to use the acquisition to accelerate the company’s entry into a new geographic market; or
  • a supplier, to reduce material costs, assure sources of supply, and gain an edge over competitors who buy from that supplier.

Good News. Interestingly, strategic acquisitions can present instances in which the subject business’s profitability and financial details are not the most important considerations. We have represented sellers in strategic-buyer situations where the main draw was some combination of a desirable product or service line, location, intellectual property, customer base (with long-term commitments), employee base, vendor relationships, or how well the two companies aligned with each other.

Because a strategic purchase may be based on factors other than multiples of earnings or EBITDA, a strategic buyer might be willing to pay more for your business than would a financial buyer, despite the latter’s presumably deeper pockets. Therefore, developing in advance one or more unique, inimitable qualities that will attract a strategic buyer, and your ability to communicate your business’s points of value to the strategic buyer – probably with the assistance of an experienced M&A professional – will maximize your ultimate selling price.

Not So Good. Selling to a strategic buyer can have its downsides. For example:

  • Break-up and Sell-off. After the sale, the business you sold may bear little resemblance to the business you built. Its brand, reputation, employee base, and other qualities that were such a great source of pride and satisfaction to you may mean little to your buyer. Within a few years under its new ownership, there may be little public evidence that your business ever existed.
  • Buyer Advantage. For many strategic buyers, the purchase of your business is not their first rodeo. Your buyer might have more experience in business purchases than you have in business sales, and that can give them an advantage in the negotiation and due diligence phases of the deal. Trying to keep up with them can take great effort, possibly at the expense of maintaining your focus on business profitability, growth, and sale value.
  • The Word on the Street. Confidentiality is a major issue in any business sale, especially when selling to a buyer in your industry, where the inevitable grapevine gossip and speculation can threaten customer loyalty, employee retention, and even lender and supplier ties.

These last two concerns – an experience gap and potential breaches of confidentiality – are two valuable benefits of being represented by a tested and proven M&A professional. (See several more concerns at “Selling a Business? How M&A Advisors Add Value.”)

Leveling the Field. At IBG Business, we tackle the experience gap by creating a competitive field of motivated, thoroughly vetted buyers – strategic or otherwise. In deal after deal, we have found that creating buyer competition, with the emotion and frenzy of an auction-like environment, makes it hard for any single buyer to stay in the driver’s seat for long.

Generating multiple buyers is vital in sales not just to strategic buyers, but to “financial” buyers as well. Read on.

FINANCIAL BUYERS

In the current environment (and in our experience), 70% of buyers for mid-market businesses are “financial buyers” – a broad category that includes:

  • ultra-high net worth individuals and the “family offices” (private wealth management firms) that serve them;
  • search funds (a team of investors that is backing an individual whom they trust to operate an acquired business)
  • institutional investors,
  • venture capital firms, and, most prominently,
  • private equity groups.

Private equity groups (PEGs) are essentially groups of investors that have combined their collective resources, business experience, and management skills to form an acquisition entity capable of raising and investing significant sums of money. They are consistently in the market for business acquisitions.

Traits. Financial buyers are professionals, and buying businesses that will generate a return for themselves or their investors is what they do for a living. Their profile generally includes some combination of the following qualities:

  • They tend to focus on small and mid-sized businesses.
  • They have financial strength and liquidity.
  • They might buy your business in its entirety.
  • They also might buy a partial interest so that, with the investment, your business can reach its next level of profitability and growth, with you maintaining some level of control (discussed further below).
  • They are buyers, not operators. Therefore …
  • They value businesses that have a strong, credentialed, long-standing management team that will stay on (maybe with you, maybe without) after the purchase and continue to run the company.

Selling to a Private Equity Group. From the point of view of a seller, deals involving PEGs typically offer benefits (such as professionalism and flexibility) and challenges (stemming from their sophistication and deal experience) that are not as common among the types of buyers described earlier. 

Professionalism. Unlike other types of buyers that might be first-time or exploratory investors, PEGs are professional investors focused specifically on making money and closing deals. They don’t require special financing; can be relied upon for a consistent, professional approach; and typically bring extensive expertise to the table. These factors can significantly increase the speed at which deals close and can help to minimize unexpected costs.

Flexibility. Depending on the subject business and the PEG’s investment focus, a PEG may execute recapitalization investments; outright purchases; majority share acquisitions, in which the PEG takes over management; or minority investments, where the PEG invests but looks to the seller to continue to run the business.

Sophistication. Their experience and requirements can pose difficult and unexpected challenges to unprepared sellers, who can immediately find themselves at a troubling disadvantage in trying to go toe-to-toe with their buyer. The number of PEGs has grown substantially in recent years due to the abundance of capital in the market. As a result, the competition for high-quality target companies has increased, leading to escalated efforts to discover hidden gems. Without appropriate representation, sellers can be at a significant disadvantage when reacting to a solitary proposition.

Fortunately, the financial buyers that we regularly encounter are usually willing to surrender some of their advantage by encouraging the seller to use an M&A broker whom they know and trust, who knows the process, can guide the seller through it, and can package and communicate their required information as they want to see it. 

Preparation. If you anticipate selling to a financial buyer, focus your preparation primarily on two key objectives: (1) maximizing EBITDA and (2) assembling and retaining a solid management team.

Your sales prep should also acknowledge a few more traits of this buyer category:

  • They tend to be relatively risk-adverse and will value a company that demonstrates consistent growth and offers a low risk-to-reward ratio.
  • Their purchase offer is usually based on a multiple of your company’s current and historical EBITDA (earnings before interest, taxes, depreciation and amortization). Therefore …
  • They are likely to obsess over your financial statements (e.g., cash flow statements, income statements, balance sheets, accounts receivable aging, and accounts payable), go through them with a fine-tooth comb, and persist in requiring seemingly endless information from you until they are satisfied that your numbers are locked down.

THE VALUE OF AN M&A PROFESSIONAL

As varied as the three types of buyers are, they have this quality in common: Selling to them will almost always go more smoothly, and with a better result, for the seller who is represented by an M&A professional.

Whatever the buyer’s size, purpose and objectives, you should expect to benefit from the services of an experienced business broker or M&A advisor in the following ways:

  • You will be well educated in the sale process.
  • You will know whether you should sell now or wait.
  • Before it goes on the market, your business will be prepared for sale in the way that will bring top dollar.
  • Your financial statements will be appropriately and accurately recast to show the business’s true earnings and book value.
  • Every precaution will be taken to preserve confidentiality.
  • When it goes on the market, your business will be presented in its best light, only to vetted and pre-qualified prospective buyers.
  • You will be freed from the hands-on management of your sale, allowing you to maintain your focus on managing your business.
  • You should receive offers from multiple buyers, giving you options with respect to price, terms, and your ultimate selection of the “best fit” buyer.
  • You will have an assessment of each buyer’s integrity, background, and financial health.
  • You will have an experienced buffer between you and your buyer.
  • You will have a loyal, steadfast guide and advocate throughout the offer/acceptance, negotiation, due diligence, closing, and post-closing transition phases.
  • When the deal is done and the commission is paid, you will emerge from the deal with substantially more money than you would have received if you had run the deal on your own.

The sale of your business, regardless of its size, warrants a high degree of professionalism that will put you on a level playing field, regardless of the type of buyer.