It is expected that the owners of 40% of small and mid-sized businesses will exit in the next five years. Many experts predict this demographically-induced wave may result in a glut of businesses for sale and a shortage of qualified buyers. If you are the owner of, or adviser to, such a business, determining the optimal buyer profile will be an integral part of the exit planning process. Why does it matter? Because each type of buyer has different objectives and unique perceptions of value. By knowing the most likely buyer profile, an exit plan can be developed to enhance the value of the business in the eyes of those particular buyers, increasing both the sellability and potential proceeds for the vendor.
Here is a brief description of the 8 primary business buyers:
- Family members– While there is often appeal to keeping the business “in the family”, statistics show that only 30% of businesses survive to the second generation. Usually, the parent will need to finance most or all of the purchase price. Any owner considering selling to family should read the outstanding book “Every Family’s Business”, by Tom Deans for a great recipe for family business success.
- Key management– Who knows more about running the business than a manager or key employee. Again, the vendor often will need to finance much of the purchase price. If this is a serious option, read “Hire Your Buyer”, by John Mill, who provides an effective blueprint for a successful transition.
- Employees, through an Employee Share Ownership Program (ESOP)– one of the most underutilized exit options; many jurisdictions offer incentives for ESOP’s, and banks are often willing to help finance the purchase price.
- Other Shareholders– If the owner has partner(s), the shareholders’ agreement may entitle them to first right to buy. Often, the partner’s familiarity with the business means that less due diligence is required. In many cases, the purchase price may be determined by an agreed formula.
- Strategic or Special Purchaser– this is commonly a competitor, supplier or customer – someone who perceives synergies from buying a certain business, and is willing to pay a premium for it. The best scenario is identifying more than one strategic buyer, to trigger a bidding war. The disadvantage to this option is having to share confidential information with a company that you might still be doing business with if the deal does not complete.
- Private equity groups– these investors tend to be well-financed and seek businesses with annual earnings over $5 million. They are a great option when the vendor wants to retain minority ownership, and take “two bites from the apple”, one on the initial sale, and later when the investor buys the minority stake too. The private equity group usually doesn’t want to run the business, so a strong management team is a good prerequisite.
- The public equity market– “Going public” may be the dream of many business owners, but it doesn’t happen very often. It is expensive and usually restricted to large companies. The appeal is much larger valuation multiples, and liquidity to convert shares into cash. Not an option for most business owners.
- Other outside buyers– there are lots of individuals and companies looking to buy businesses, with varying levels of sophistication, financial capability and objectives. Reputable business brokers and investment banks have huge data bases of interested and capable buyers. Their commissions can be significant, but they have expertise and experience at bringing buyers and sellers together.
“Exit Options Analysis” is Step 4 of our six step “Value Enhancement and Exit Readiness” (VEER) program offered by A-R Partners. LEARN MORE