Who is Your Buyer?

Before starting the selling process, determining where your potential buyer will come from will put you ahead of the game. Know who your buyer really is.

Each business transaction is different, but there are common factors to any deal. There are certain main aspects of a buyer, each with their own list of pros and cons to consider, which typically are:

  • Do they have industry (whichever type your business falls under) knowledge/experience?
  • Are they a first-time buyer?
  • Will they need financing?

A business broker should be able to give a preliminary idea or priority list of the most likely types of buyers. By knowing the type of buyer, the seller will have a better understanding of their needs or constraints when it is time to make or close the deal.

Broken down to the main or top-level categories, there are essentially six (6) different types of buyers. Again, what is a “pro” for one type, might be a check in the “con” bucket of another type.

Is Your Buyer the:

Corporate Executive

A usual concern for this type of buyer is whether or not they are trying to relocate or stay in their current geographical location. These are often first-time buyers, but make sure they are serious. A business transfer requires a doer, not a dreamer who is not ready to leave their current state of employment.

Competitor or Vendor

This can be the best idea or the worst idea. Though they will have knowledge of the industry, if the business transfer is not a quick process, a competitor can cause harm in the marketplace to drive down the revenue. However, due diligence should be cut markedly. Depending on their motivation, they could pay a considerable amount more than asking or their situation might not require inventory that could be on hand and therefore result in not wanting to pay top dollar.

Existing Employee(s)

A great option for bank financing if they can come up with the funds for securing the loan. Being that they are already invested in the business, they are of lower risk. If they are not able to come up with these funds, owner financing should be expected to be on the table. So it is fundamental to know if the business is being sold to a business minded individual.

Investment Group

They are always looking for a good deal but are not interested in handling the day-to-day responsibilities. If a good management team or the owner is staying on in some capacity to run the business, the deal is more likely to sell for asking price.

Intergenerational Buyer

Keeping a business in the family can be ideal. A good rule of thumb is to use an unbiased third-party company to handle the valuation before a deal is put on the table. Family transactions can carry the added weight of emotion, so using separate attorneys and CPAs as any other business transactions is recommended. Because of familiarity, it can also lengthen the time for an accepted offer. Make sure to set clear expectations so relations are not damaged in the process.

Foreign and Public Companies

This is a very unlikely buyer for small businesses. The larger the transaction, the more viable an option this buyer type becomes. Being in contact with this type of buyer will require clear mediation to determine what each other’s requirements of the deal really are.

To learn more about how to find the right buyer for your business, pick up a copy of EXIT– A Business Owners Guide to Selling a Company, by Alex Vantarakis.


Business Insights: Understanding Different Types of Buyers, the Buyer to Business Match-up

There are numerous possibilities for the types of buyers to whom a business would be sold. Options are often limited by the nature of the business (ie: the industry, the company’s size, profitability, the number of employees, whether family members are involved in the business, or whether there are co-owners).

Unless you have a partner or family member to whom you intend to transition the business to, most small businesses with valuations below $3,000,000 will be sold to a third-party individual. Others might be sold to employees. Businesses with valuations between $3,000,000 and $5,000,000 have more options as they might be sold to wealthy individuals, larger companies or private equity groups (PEGs). Middle market businesses with a valuation of $5,000,000 or more typically are beyond the reach of wealthy individuals and are acquired by larger businesses for strategic reasons or by PEGs looking for significant returns on their investments.

Here is an interesting article that delves into types of buyers – The 6 Types of Buyers for Your Business


Closed Deal Case Study: Unrealistic Expectations of Business Value

Challenge:  Business owner neglect led to a significant revenue decline without understanding the impact on the business value

A business owner that sold home décor contacted The Vant Group (TVG) to sell their business. The business was over 10 years old and the owner was becoming distracted by other life ventures.  Due to this, they started to lose interest in the business and revenues began to decline.  Eventually, it dropped to 25% of previous revenue, and the decision was made that it was time to sell.  The owner’s expectations of the business value were based on the profitability of the business when it was in its prime.  Unfortunately, the value of the business was now significantly less than had it sold before the decline in revenue.  After understanding their current value with a valuation of the business, they chose not to market the business for sale and hold on to it.

Approach:  Value is set by what the buyer is willing to pay

A year later, TVG received an email from a buyer that was looking for a type of business with very specific criteria.  The profile fit the home décor business and TVG contacted the owner of the business to ask if they would be interested in talking with this buyer.  Unfortunately, they had allowed revenues and profits to decline even further during that year. The buyer put in a Letter of Intent and the seller countered.  The buyer was not willing to pay what the counter offer proposed as the seller was still unrealistic about the current value of the business.  Many months went by and finally, the buyer decided to give another offer.  There were several months of back and forth on the offer.  Eventually, the seller had decided to move from Texas to another state.  The seller realized that they needed to sell the business before they moved.  At this point, the seller became realistic about the offer they had received.  Though they had not put their business up for sale and had let their business decline, fortunately, they contacted TVG and allowed this guidance to provide an offer through the TVG connections.

Result: Closed in one month after terms were agreed upon

The seller now needed a quick sale and realized that the deal terms and purchase price offered by the buyer were their best options. The buyer and seller settled on a final purchase price, terms of the sale which included a consulting agreement and future earnings, and which inventory items would be included in the purchase.  Luckily, they were able to sell their business within a few weeks of selling their residential home in Texas and make a clean break to their new state destination. Without the help of TVG, they would have never sold their business, and it would have died a slow death.  Now, their original designs and home décor items have been placed in willing and capable hands. They will also be able to see the business they founded gain back the level of recognition and profitability it had once known with the goal of even greater growth.