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In many cases, the business owner finds it difficult to know who they should target as a potential buyer for their business. At first glance, any buyer with a checkbook may be attractive. In practice finding the right business buyer type when selling a business is both an art and a science.
(Click on the image to view larger size. For more details, scroll down!)
Similar to selling commercial real estate, knowing who the buyers are and what motivates them is beneficial. Likewise, when determining the asking price for a business, it makes good sense to understand the nuances associated with the three types of business buyers. Doing so will improve the entrepreneur’s likelihood he will receive the maximum net cash from the sale.
The Strategic Buyers are Plentiful
Over the past four years, Strategic Buyers have outnumbered Financial Buyers nearly 14-to-1, according to the S&P Capital IQ group.
Since the great recession, many buyers with cash on their balance sheet have been busy seeking synergistic businesses to acquire. The strategic buyer has been exploring ways to improve their own business value through the acquisition of other related businesses with the ultimate intention of eliminating duplicated expenditures and searching for new, bigger opportunities post-closing.
Because the strategic buyer’s post-closing acquisition has the potential to create a more profitable and likewise more valuable business once duplicated expenditures are eliminated and new opportunities for growth are uncovered, the strategic buyer is likely to pay the seller a premium for his business. According to S&P Capital IQ, strategic buyers across all business sectors in North America during the two years ending August 31, 2013 have paid 2% more than financial buyers for acquisitions measured by Enterprise Value to EBIDTA .
The Financial Buyers Know Exactly What They Want
Financial buyers are seeking businesses in need of capital, leadership and management processes. Often teams of investors, MBA’s, former Fortune 500 Executives and entrepreneurs pull their resources to acquire businesses.
These financial buyers source opportunities through their rolodex (now replaced by LinkedIn). They search for ways to create new opportunities, improve processes and lead through their connections. They do so without the benefit of another business on the sideline offering synergy.
The value of a business to a financial buyer is tied to what has happened in the past and typically a premium is not paid to the seller.
The Management Buyer is a Viable Option, Too
In many cases selling a business to the existing Management Team may be an ideal alternative to a third party sale. Management Buy Outs, also known as an ‘MBO’s’ are similar in many ways to a Management Buy In, or ‘MBI’. In either case, ownership of a business shifts from the entrepreneur/founder to inside management.
It’s not unusual for an MBO/MBI to be financed with capital from a bank or other alternative source, which minimizes the amount of cash needed from the management group.
The Centre for Management Buy Out Research found that during the first five years after a MBO/MBI:
- 69% Increase Production
- 62% Expand into New Markets
- 53% Invest in New Locations/Sites
And during the first four years following a Buy Out, nearly two-thirds of the MBO’s hire additional employees and enjoy a business growth rate range is between 9-to-12.5% each year!
Buyers looking for businesses to acquire compete fiercely for good opportunities. For the entrepreneur who has nurtured and grown a valuable business, he should expect multiple offers from a variety of sources. Regardless of the buyer type, armed with knowledge and sound advice, he will fare well.
This is a great visual of the three types of buyers and helps me understand what I am up against as a financial buyer!
I’ve been looking for a business to buy for almost a year now and find there is a lot of competition for profitable, well-run businesses. Do you have any tips for me to find the right business to acquire? Thanks!
Thanks for your input and kind words!
Indeed you are up against strategic buyers with lots of cash and opportunities waiting in the wings and management buyout members who have the great advantage of feet on the ground on day one post-acquisition–that’s tough competition!
Over the past few years, I’ve observed an overwhelming number of former business owners who have decided to put their personal capital gained from the sale of their former business(es) back to work by attempting to acquire another business. I believe this is adding to the difficulty for financial buyers to successfully acquire a business.
The best tip I can offer you if you’re a financial buyer seeking a business to acquire is to spend as much time as possible studying a specific industry of interest and making as many connections with that particular industry as possible. That’s a long process. I am sorry to say there are no shortcuts. Set out to learn from and connect with those people knee-deep in whatever industry that piques your interest. By doing so, you will be well-prepared to evaluate opportunities that surface and have a means to reach the deals as they come to the market.
All the best…