When you’re getting ready to sell your company, there’s a lot of advance work that must be done. Cleaning up the books, getting documentation in order, setting financial goals, and preparing to tell your story – those steps are the same no matter who your buyer turns out to be.
But there are several types of buyers, and they approach diligence and negotiation differently. Here are some of the differences:
The Individual Buyer
Individual buyers are undergoing some sort of transition. They may be working in the industry and ready to make the leap to owning a company. They may be leaving a corporate career for business ownership. They’re evaluating the idea of ownership alongside the company and its risks.
They will almost always use some kind of debt financing, often an SBA loan, to purchase the company. Some may propose creative financing options, such as Seller Financing or Earnouts. This is at least partially fueled by Internet gurus who sell courses, telling buyers they can buy a business with no money down. The more serious and motivated buyers understand that most sellers won’t want to wait years to collect their money and will ensure they can qualify for an SBA loan. Their questions will go beyond the financials; for example, they’ll ask about the owner’s day-to-day duties. They might be more relationship-focused than other buyers, asking about customers and the team. “What motivates your second in charge?” “What should I know about keeping your biggest customer account happy?”
Individual buyers are often motivated by and concerned with the same things the seller is, so it’s sometimes easier to prepare for their questions and establish rapport. They want to envision themselves in the shoes of the owner running the day-to-day business. They are most common in businesses with under $5 million in gross revenue, but will sometimes buy businesses with $10 million or more in revenue.
The Professional Buyer
Private Equity firms are the classic professional buyers; they actively seek companies to acquire. This group can also be called Financial Buyers and may include Family Offices, Independent Sponsors, or Search Funds. Their motivation is strictly financial, and they look for profitability and growth potential. Generally, they acquire a company with the intent to sell it again within 3-5 years, so they look for firms they can turn around or grow quickly with an infusion of capital or expertise.
During that time, they will actively improve company operations by slashing expenses and offering expert guidance. Because they’re not in the business of running a company, they’ll often ask a seller to stay on as a minority owner, work in the business for a few years, and sell again after the company has gained value. This is commonly known as “taking a second bite of the apple.”
PE firms often look for companies with at least $5M in EBITDA to build a platform as a base for future add-on acquisitions. They typically don’t chase smaller companies, as it involves more work and risk to justify the investment. But we’re seeing a trend in some industries and parts of the country. As industries consolidate and competition intensifies, some PE firms are considering smaller companies. Because they are used to doing bigger deals and don’t alter their process for smaller deals, they may ask questions you wouldn’t be prepared for unless you have professional representation. For example: Tell me about your cybersecurity plan. What is your LTV:CAC (Lifetime Value to Customer Acquisition Cost)? What is your NPS (Net Promoter Score)? What is your market penetration rate? Of course, the questions will vary based on the industry, and they typically require an extensive list of documents for legal, accounting, and other due diligence.
Professional buyers have teams that source companies to buy. They have another team that conducts due diligence, another team handling legal, etc. The seller will likely interact with many people in the course of putting together a deal; it’s a very different process than establishing rapport with an individual buyer. In these scenarios, it’s important to have an experienced M&A Advisor, Investment Banker, or Business Broker looking out for your best interests, because professional buyers are well-versed at getting the best possible deal for themselves. If you have never sold a company before, you are at a distinct disadvantage, and it may feel like you are taking a knife to a gun fight if you don’t have the right advisor on your side.
The Strategic Buyer
A PE firm can be a strategic buyer if they are already invested in your niche, but the definition also includes a competitor or another company that is pursuing a vertical or horizontal integration. In these cases, it’s especially important to work with a broker so they can maintain your confidentiality. If the word were to get out that your company is for sale, your competitors might use the information to lure away customers or key employees. It also makes employees nervous, and many of them might choose to look for another job rather than live with uncertainty.
A strategic buyer will be concerned with streamlining operations and achieving economies of scale, so they may ask questions such as: How are you processing payroll, and what are the costs associated? Who handles your bookkeeping and accounting, and how much does that cost? How much are you investing in marketing and advertising? Their goal is to identify operational overlaps they can eliminate to increase profitability.
The good news about these buyers is that they often make higher offers for companies because they have additional motivations for buying: expanding market share, geographic reach, or product offerings; reducing competition; or acquiring talent or technology.
An experienced business intermediary can help you navigate each of these buyers’ processes and protect your interests in the deal. To start a confidential conversation about your business, click here.
