12 Sep A Seller’s Guide to Different Types of Buyers for Your Business
So you’re selling your business. Stepping out of your business requires careful, intentional thought and planning. It’s vital to have an exit plan in place. You wouldn’t jump out of an airplane without a parachute, would you?
Once you’ve completed that planning process, however, you’ll face the task of finding and selecting the right type of buyer. In order to identify a short list of prospective buyers for your business, you need to understand who they are and what motivates them.
Most potential buyers or investors fall into one of two main categories: financial or strategic.
What is a strategic buyer?
This type of buyer is typically an independent corporation that provides goods and/or services. This could be a direct competitor, supplier or customer. However, strategic buyers can also come from areas not related directly to your industry. Often this type of buyer is looking to diversify revenue sources or obtain synergies with a company they feel will enhance their profitability and potential growth.
In general, you will share high-level financial information with a strategic buyer. They will also be interested in your client and/or supplier base. When sharing information, keep in mind that this buyer will likely be familiar with your type of business, so you won’t need to go into great detail.
You will typically be expected to share the following information with a strategic buyer:
- Basic summaries of your income
- Cash flow statements
- Balance sheet
- Client demographics
What is a financial buyer?
These types of buyers are in the business of making money by investing in companies. They’re seeking private companies whose current or future performance will provide a return on their investment. While financial buyers may participate in managing and growing your business, their ultimate goal is to sell their interest for the greatest profit.
Financial buyers may include:
- Private equity firms
- Family offices
- Search funds
- Holding companies
Private Equity Firms
Private equity firms (PE) are made up of limited partners who invest their money into funds, and the general partners of the firm use those funds to buy companies. PE executives will often retain owners and management teams to run the day-to-day operations but will infuse their expertise and resources to take a business to the next level. PE firms can be a great way to help your company reach its potential, but these firms are generally only motivated to maximize profitability in the short-term.
Similar to private equity firms, a family office invests the money of a single wealthy family. Their focus is typically on a specific industry. Family offices tend to invest over the long-term, paying in cash. Decision-making is also more streamlined than with other types of buyers. While a family office brings a wealth of expertise to the table, they’re more hands-off when it comes to operations.
Search funds consist of a team of investors backing an individual who is interested in taking over a business. This could be a recent MBA graduate aspiring to own a business or someone with a personal interest in a certain type of company or industry. Though this scenario can involve some risk with a younger buyer, it can also be a great opportunity to ensure the future vitality of your business.
Also known as “shell companies,” holding companies exist solely to own other companies. These entities don’t sell products or services. Instead, they get their revenue from stock earnings and dividends from the businesses they own. These companies will seek a controlling interest, which means that while a sale to this buyer is a relatively easy way to acquire cash equity, you will also have more decision-makers to contend with.
What about internal buyers?
Sometimes the right buyer comes from inside your business. An employee stock ownership plan can be structured to turn business equity into retirement funds for employees. This arrangement also provides employees with a way to buy out all or a portion of an owner’s interest up front. This gives employees a greater sense of ownership in the business. Transferring ownership to employees or an employee can help ensure the business continues along the path you set for it in your absence. However, this type of arrangement can also introduce an administrative burden that could slow future growth.
At NYBB, we can help you select the right type of buyer for your business. Contact us to start identifying the short list of prospective buyers.
New York Business Brokerage (NYBB) specializes in the confidential sale, acquisition and valuation of small to mid-sized privately held businesses. Since 2003, NYBB has been dedicated to serving clients with professionalism, integrity and confidentiality. As an innovative leader in the business brokerage industry, NYBB continues to raise the bar by establishing itself as one of the most trusted and respected names in the business buy/sell marketplace.