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16 Sep The Buyer for Your Biz

There are three types of business buyers – individual, industry and private equity. As a business owner that will one day sell, you need to know which type is most likely for you. Going after the right type of buyer can make all the difference in price, terms, and what is done with your business and employees after the sale. Further, the search technique is different for each.

Before we delve further, however, you may not agree with some of the things I am going to say. In the fifteen years that I’ve worked full time representing business buyers and sellers – and spent thousands of hours studying and writing about how businesses are bought, sold and valued – I’ve come to understand that business owners and their advisors have a lot of conceptions about these matters, despite that few have many first-hand experiences. To be sure, few people have enough experience with business purchase and sale transactions to have a “statistically significant” sample. And so, misconceptions are prevalent. Perceptions are colored by what is heard, or read, and the very limited number of first-hand experiences.

To that end, I hope you will try to set aside whatever beliefs you might have about buyers and buyer types and read with an open mind. Ponder the merits and rationale of what’s herein. Yes, we generalize. Yes, we know there are exceptions to every rule. Still, in most cases, the generalizations hold true.

The Individual Buyer

Individuals are the primary buyers of businesses that book annual profit under $1,000,000. This is because few individuals have the financial wherewithal to buy larger businesses, and PE groups and industry buyers, i.e., existing companies, have higher overhead costs that make smaller acquisitions uneconomic. Some smaller regional companies that operate in the same (or a similar or adjacent) niche may be candidates, but the industry-buyer candidates viable for any single small business are typically few. The seller must hope one is interested and willing and able to pay a fair price. If not, you’re stuck with individual buyers.

The good news is, individual buyer candidates are numerous. Every Tom, Dick and Harry wants to buy a business. Become an owner. So all you have to do is tell the world you have a business for sale and candidates will line up at your door. The bad news is, you can’t really do this and maintain confidentiality. Further, it’s hard to identify and target “business buyers.” They’re just “out there,” holding jobs, unemployed, underemployed, retired, or – my favorite – “on sabbatical.” So to find them you really do have to “get the word out broadly,” which makes confidentiality a challenge.

Individual buyers also move in and out of the market. They really only want one business, so if they find one, they’re gone. Out of the market.

Many individual buyers will be out of a job. Their objective will be to find a source of cash flow and self-esteem. They’re looking for either a good job or a business to buy. When they secure one, they’re out of the market.

By the way, in my experience, if a buyer wants to find either a job or a business to buy – they’ll find the job first. Buying a business is scary, time-consuming and risky. A job is lower-hanging fruit. So if a buyer says he wants to find either a job or a business, I say goodbye. They’ll never buy.

So what’s the best way to find individual buyers? Let them find you. Put your opportunity on websites that list businesses for sale, such as BizBuySell.com. Serious buyers will search there to find opportunities located in the places they want to live. Next, advertise the opportunity in the business-for-sale section of the local paper’s classified ads. Buyers will look there. Third, share your opportunity with all the people you know. Those people will know buyer candidates and send them to you.

Regarding confidentiality, I don’t suggest you spread the identity of your business all over the place and let the world know it’s for sale. Use a generic summary of the business. Tell the basics of location, industry and size – but not enough to reveal the identity. Of course, if you sell it yourself, every time you talk to a buyer they’ll be able to figure out the identity (unless you lie about your name, which can be pretty awkward). Brokers, on the other hand, can use the generic summary and screen the buyer candidates out and avoid having to reveal the identity of the business to 90% of the candidates, i.e., those that are screened out. That goes a long way to maintaining confidentiality.

One more thing: It takes a lot of time and energy (and to some degree, skill) to interview and screen the individual buyer candidates that respond to “opportunity” advertisements. Most respondents will be a waste of time (assuming you want a fair price). They either don’t have the cash they need, can’t get a loan, lack the motivation/guts, or all the above. And getting them to answer your screening questions honestly and directly is a real challenge. Do the job right and you’ll irritate quite a few. Maybe even enrage one or two. The task requires some very direct questions and the probing of responses to gain clarity.

If you’re lucky, you’ll find one with the money, integrity, serious motivation and the guts to pull the trigger. If you’re really lucky, this person will also have experience buying a company. If not, you’ll have to be patient and spend a lot of time talking, handholding and reassuring.

The Industry Buyer

This is the general category for “businesses” as buyers. If you own a business and wish to sell, one possible buyer type is a business that currently operates in your industry or a related industry or niche. It’s these buyer types that may be able to enjoy “synergies” and thereby operate combined businesses more profitably. As such, it’s this type of buyer that can – and sometimes will – pay a very high price.

Of course, very few businesses are sold at prices that greatly exceed their stand-alone, risk-adjusted economics. When it happens, however, word can spread rapidly.

Critical to garnering a premium from an industry buyer is: a) the candidate must have considerable financial resources, and b) the selling company must offer considerable real or perceived value to the buyer.

Regarding the latter, the key is the value the acquirer can (or thinks it can) obtain for its existing operations by acquiring the seller. In the ideal case, two or more capable industry competitors will see similar synergistic value in an acquisition target and view winning the deal to be vital to their long-term viability.

The larger the industry buyer, the larger the acquisition must be to make economic sense. A $1 billion company will rarely mess with acquiring a $1 million company unless there is a unique circumstance. In other words, why go to the risk and trouble of acquiring a company unless it will have at least a material incremental impact on the financial performance of the business. A 1% increase in revenue and profit is not worth it.

Similarly, a certain business can only acquire a company so large. Depending on the financial strength of the acquirer, an acquisition of a company up to 50% the size of the acquirer may be doable. So, for any would-be seller, there may be only a handful of potential industry buyer candidates that might be “a fit” and also be the right size (not too small and not too large).

Finding industry buyers can be pretty easy, and the process is much different than locating individual buyers. Business owners will already know their competitors and peers. It just requires some thought and a pencil and paper. In some cases, maybe a little research will help. Now, identifying businesses that operate outside one’s industry but might find synergies by acquiring a certain company may require more head scratching. But, if such a candidate can be identified, a great buyer might be uncovered. Some selling and savvy “dealmanship” will probably be required to make it a reality.

By the way, direct competitors are rarely good buyers, and I’m not entirely sure why. It just rarely works out. It may have to do with the ill will that builds up between competitors over time. The parties just have a hard time working cooperatively to complete a transaction that offers benefits to each (as is necessary in a business purchase-sale transaction). There’s just too much innate mistrust. Lack of trust will kill a deal every time.

What’s the downside of the industry buyer? Well, smaller industry buyers can be as inexperienced at acquisitions as individuals. Larger industry buyers can be extremely slow and bureaucratic. Also, selling to an industry player can lead to the closing of your location and layoff of your employees.

Business Buyer Types and Characteristics of Each
Individual Buyers
Primary buyer for small businesses (under $14 million annual profit)
Numerous yet challenging to locate/target/identify
Notoriously fickle and indecisive. Can waste seller’s time.
Commonly inexperienced and undercapitalized.
Usually personally take over management of the business.
Important to check background (though doing so can be challenging)
Private Equity Groups
Very active for businesses with $3 million + in annual profit
Serial buyers by design
Numerous
Very experienced. Make decisions quickly. Won’t waster your time.
Most have or can get the equity and debt necessary to close.
Rarely relocate the business. Almost always retain employees and key managers.
Easy to do background checks. Low risk of getting scammed.
Industry Buyers
Candidates for businesses of almost all sizes.
Easy to identify but not as numerous as individuals or PEs
Not as easy to deal with as PEs. Can be easier to deal with than individuals.
Some are experienced acquirers; others are not. Often waste seller’s time.
Most are conservative about what they are willing to pay. At ties, however, will pay a premium.
More prone to relocate business and/or lay off some employees
Can be risky/tricky to approach when a competitor

Industry buyers have the ability to consolidate your operations into theirs. Industry buyers can be pretty rough on the selling company’s employees. Sure, being acquired by a larger company can offer opportunities for advancement and relocation, but acquiring companies tend to place a higher value on their own managers, often appointing an employee of the acquiring firm to take over management of the acquired, and usually require the acquired company to adopt the policies and culture and methods of the acquiring company.

Interestingly, many businesses are owned in whole or in part by a private equity (PE) group (see below). As such, these industry buyers can also take on characteristics of PE buyers. In most cases, it’s a good thing. As described below, PE groups tend to have plenty of capital, know how to get deals done, and be very acquisitive.

The Private Equity Group Buyer

Private Equity Groups (PEs or PEGs) are groups of people or firms that invest in or acquire businesses in a variety of industries and locations. Typically, they want a controlling interest, but they also want the key manager or managers to own equity in the business, either directly by buying an equity interest or indirectly though incentive stock options (or both).

PE groups “get their money” from a variety of sources. Sometimes it’s money previously earned by one or more of the principles, i.e., individuals involved. Or money owned by members of a wealthy family. Some raise their money in the form of “funds” from wealthy individuals and/or institutions, i.e., schools, foundations and very large corporations. The common denominator among PE groups is they have money to invest in private companies and, in almost every case, they’re staffed by people that:

  • Have a lot of experience investing in, supporting the growth of, and then selling their interest in private companies
  • Are very well educated
  • Know how to support good management teams and make add-on acquisitions

For some reason, many business owners and their advisors look at PE groups (financial buyers) with a jaundiced eye. They view them as buyers that don’t care about the employees, rob businesses of their souls, look at the business as simply a tool to make money, and won’t pay fair prices because they don’t have “synergy.” I (the author of this article) have no agenda except to serve business owners (our readers) well by providing them with information they can use to expeditiously secure what they very much deserve – a maximized payday.

My experience is PE groups can be tremendous buyers, on the whole. Sure, there are some bad apples. But there are a lot of PE firms that buy businesses. No, they don’t know how to run your business. Heck, they don’t WANT to run your business. That’s why one common misconception is clearly inaccurate. PE buyers depend on your established personnel to manage the business post-purchase. So – in stark contrast to the common perception among the inexperienced and uninformed – PE buyers are great for the employees. PE buyers know where their bread is buttered and they work very hard to maintain a great relationship with the established business managers. In fact, they won’t do a deal unless they are certain the established management is tenured, talented, proven, and willing to remain.

Individual Buyers
Industry Buyers
Private Equity
Risk of laying off employees
Low
High
Low-to-Mid
Likelihood of relocating biz
Low
High
Low-to-Mid
Experienced biz buyer
Rarely
Not Always
Always
Could waste your time
High
High
Low
A tenant for your real estate
Likely
Maybe Not
Likely
How many of them?
Great Number
Limited
Many
Buyer for Biz w/ annual profit
< $250K
Definitely
Unlikely
No
Buyer for Biz w/ annual profit
> $5 million
Very Rare
Yes
Yes
Buyer for Biz w/ annual profit
> $1 million and < $3 million
Not often
Yes
Some
Will want top managers to remain
Yes, but will take owner-seller’s place
Maybe Not
Yes (or won’t buy)

Yes, most PE groups want to grow the business and then sell it in three to seven years. Not all, but most. Many sellers cringe at this. But, again, I’ve seen it work out very well for all the parties. There’s rarely much disruption when the PE owner sells. Heck, the first PE typically sells to another PE, which simply takes over where the former left off. The existing management team just keeps doing what they do.

I know scores of business managers that will attest that when their owner-manager sold to a PE firm and the owner phased out, the experience was positive, enlightening and profitable. At least, that is, for the talented and hard-working managers. They get great support and significant financial resources to grow the business both organically and through acquisition.

There are a lot of PE groups that are active in the U.S. The profession is very well established. My firm (Acquisition Advisors) tracks some 350 PE groups that acquire U.S. companies with annual profit between $1 million and $40 million. So, if you have a skilled and well-connected M&A advisor to represent you, locating PE buyers is easy. If you don’t, the best way to identify candidates may be through your industry or trade association.

The benefits of PE group buyers? They’re experienced, know what they want, won’t waste your time, and have ample capital. The bad news? Well, in theory, they don’t pay great premiums. PEs are financial buyers, so there’s no possibility that synergies will provide a magic carpet ride to riches. True, I guess, unless the PE owns companies in your industry – which very well may be the case.

In summary, which buyer is right for you? That’s easy. The one that is willing and able to pay the most! Hopefully, this article will help you figure out which buyer type might offer the most promise and how to identify and work with them. But, in the end, the undisputed key to a timely and price-maximized sale is: multiple buyers worked simultaneously, with urgency.

Approach and “work” ALL buyer candidates – and all types – simultaneously. Only then will you know which is willing and able to give you the very best deal. And if the winning buyer falls through, no problem. Go right to the next best offer.

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