Before the selling process begins, it is important to determine from where the prospective buyers will come. A few questions to consider are: Will the buyer have industry experience? Will he be a first time buyer? Will he need financing? A TVG Business Intermediary will be able to provide a preliminary idea or priority list of the most likely type of buyer for a business. By understanding the types of buyer, a seller will be able to anticipate the buyer’s different financing needs, geographic constraints, and list of priorities.
The different buyer pools are as follows:
- Corporate America, First-Time Buyer
- Competitors / Vendors / Synergistic Buyers
- Existing Employees
- Investment Groups / Investors
- Intergenerational buyers
- Foreign and Public Companies
According to the nation’s largest Business Intermediary exchange, Business Broker’s Network, approximately 70% of the buyers for small businesses are first-time buyers. The majority of these buyers are coming out of corporate America. This type of buyer generally needs some type of financing and will either be a victim of corporate downsizing or will have voluntarily opted out of the corporate rat race. It has been our experience that he will not have a specific target industry that he is searching for. Usually what determines the ultimate business he purchases will be determined by a combination of good cash flow, location and availability.
A word of caution about buyers that are still employed in corporate America; they are rarely in a position to make a quick decision if any decision at all. Often the employed executive is waiting to uncover the business of his dreams and then decide if he is really going to give entrepreneurism a try. Be cautious with a buyer that is still in corporate America since he may very well be a dreamer rather than a doer.
Due to confidentiality, competitors/vendors should be approached with extreme caution. Even though either group may be the best buyer candidate, in many cases they should be the last prospects to approach. In all due respects to signed confidentiality agreements, by marketing your business you are still exposing yourself, and in this case to the people in the best position to harm you in the marketplace. You should make sure that the competitor/vendor is well aware of the exposure, and to keep a tight rein on company information. It is a good idea to proceed on a prospect-by-prospect basis when contacting competitors or vendors.
There are some advantages however in selling to either competitors or vendors. The decision process and due diligence period can be most efficient since the acquiring company knows the market and the industry. These buyer types are often only interested in verifying basic company information and determining if there is a synergistic fit. In addition, financing difficulties are not as prevalent as with other types of buyers. The seller may not be required to offer any form of owner financing since the acquiring company may have that basis covered from the beginning.
Most often, we have found that business-to-business purchasers are not always the highest paying buyers because they are unwilling to pay the highest justifiable price for a business. Often these buyers would rather set up their own facility with in-house assets before paying top price for an ongoing concern that includes substantial goodwill value. Many times we have seen owners with dollar signs in their eyes visualizing selling to a large company in their industry with deep pockets seeking to penetrate the seller’s market. Although this situation has certainly occurred, especially during consolidation periods in an industry, it is not the norm.
Many business owners feel that the best prospect for their business will be within the employee ranks. This can be a viable, positive method of exiting while also rewarding loyal employees with ownership. It is normal to think that employees would be a natural choice, but there is a saying about people in business: “There are leaders and there are followers and very few followers ever become leaders.” After an employee and his spouse discover the reality of the down payment, the monthly debt payments, and the overall responsibilities involved in ownership, the employee usually remains an employee.
Partner buyouts are the most easily financeable transactions of all, assuming the buying partner acquires 100% of the company. The buyer can often initiate the transaction for no money-down, based on the equity currently held in the business. Find out more about how TVG can help facilitate this tranfer.
Also refereed to by other names, such as Private Equity Groups etc, these firms purchase businesses as a “portfolio” item for their investors. The investment group at its core is a pool of high income individuals that join together to hedge risk by purchasing several businesses for the group’s portfolio. This type of buyer is going to be interested in both a superior investment as well as a strong management infrastructure. In many instances, the investment group is only interested in the cash flow and has no interest in running the business themselves. In this situation the seller may be in good position to stay on as a manager as well as receive an income stream from the sale. It is safe to say that if a business does not have management in place, the investment group will either not be interested or will drastically discount the deal.
Sometimes the best buyers are relatives. It should be noted that unless certain procedures are followed, intergenerational sales could be difficult. It is advisable to hire a valuation company to set the sale price in an owner-to-family member transfer. Find out more about a business valuation. If a valuation company as an unbiased third party establishes the price, chances are this will not be an issue either before or after the sale. The valuation company selected should have a good reputation as a specialist in business valuation, and as such, will include documentation for the findings. After the price is established, the family member should be handled like any other prospect.
A frequent problem that occurs is that a family member can take extensive time to make up his mind about purchasing the business. A good way to handle this problem is to give the family member a first right of refusal for a defined time period. If the family member exceeds this time period, he should be ready to compete with other buyers for the business. Also, the family member should use a different CPA and attorney than those used by the family in the business to handle his side of the transaction. If ground rules are established from the onset, there will be fewer problems and hard feelings between family members as the deal progresses.
Although not as prevalent as some of the other buyer pools, this pool cannot be overlooked. Foreign and public companies are rare in the small business acquisition arena. A seller should have a solid support team before attempting negotiations with foreign or public companies. Much time can be wasted in understanding the buyer’s parameters and the exchange of information. Transactions of this type take significant time and often end in frustration.