Hide and Seek: Where do I Find a Buyer for My Business?
By: Amy LaSala
When I ask business owners who the most likely buyer is for their company, more times than not the answer I get is a local competitor. This may be accurate for small businesses with revenues of less than $500k. However, as your revenue and EBITDA increase the likelihood of knowing or directly competing against your buyer decreases. Increases in financial performance such as revenue and more dramatically EBITDA, also open up the buyer pool to different types of buyers. Generally speaking, there are three types of buyers. Let’s take a look at each of them.
High Net Worth Individuals
A high net worth individual is typically someone who is looking to buy their next job. They have been in the corporate world and are seeking to exit the rat race and run their own business. This type of buyer usually looks for a smaller operation where they will be a hands-on CEO. They are usually entrepreneurial in nature and realize it is easier to purchase a going concern rather than start from scratch.
Since these buyers are still in the corporate world, they can be hard to find. Often these buyers look for businesses on listing sites or use their network to hear of available opportunities. This type of buyer is looking for a cheap or fair deal when purchasing a company. The most important consideration for these buyers will be the intrinsic value of their expertise in supporting financial gains within the organization.
A strategic buyer can come in many forms. It could be a similar company looking to expand its footprint or geographic area. A strategic company could be looking to grow through horizontal integration, acquiring companies within the same industry but diversify its current product or service offerings. A buyer of this type could also be looking to grow vertically, acquiring companies who produce goods in its current supply chain or provide access to new distribution opportunities.
Synergy is the goal for this type of buyer. They are looking to achieve economies of scale and become more efficient. 1+1=3. These buyers are often able to gain more value from this type of acquisition and are willing to pay a premium for a business. What these buyers are focused on are people, processes, or risk mitigation.
Private Equity Group
A private equity group (PEG) is a hybrid of the two previous buyers. A PEG is an investment management group that can be flexible in their structures purchasing 100%, a controlling interest, or minority interest of privately held companies. PEGs are financially backed by high net worth individuals who are looking to earn a return on their investment in excess of what they could achieve in the stock market. PEG management styles very from office to office. One group may have a hands-on management style, helping streamline operations. Another group may not be part of the day-to-day operations of the company and may even bring in their own management team.
PEGs look at buying companies as a platform or a bolt-on. A platform company is usually the first company they purchase for a portfolio. To continue to grow the platform company, PEGs then begin to strategically acquire smaller companies that can easily fit into the platform. This could be a vertical or horizontal acquisition. Private Equity Groups are also known to pay a premium when they are able to see the synergistic value of a company they are acquiring. Growth potential with minimum capital investment is the most important consideration for this type of buyer. They are concerned with looking for strong management, robust and efficient processes, and the opportunity to consolidate or “roll-up” a fragment sector.
So how do I find the right buyer?
This is the million dollar (and frequently multi-million dollar) question everyone asks. The first step in the process is to understand your goals from the sale. Knowing what your goals are will help narrow your focus on the right buyer pool.
- Do you want to sell 100% of the company or a controlling/minority portion?
- Do you want to stay working for the company post sale?
- Is your #1 goal getting the top dollar amount?
- Do you want to maintain your company’s legacy?
- Do you want to take care of your employees?
The next step is understanding what value your company is most likely to achieve in today’s market. This is easily accomplished by having a valuation performed for your company. Knowing what your normalized EBITDA is and having a professional assessment of Fair Market Value for your company sets you up for understanding whether you are ready to consider a sale. I have worked with many business owners who had a gut feeling of what their company should sell for and the valuation fell short (sometimes dramatically) of that number. After reviewing the valuation report, owners were able to understand why the actual value was lower than their expectations. The owners then had two choices: go to market at a lower-than-expected value or make internal improvements and hold off selling for now.
I’m ready to sell. What now?
This is where you engage with an advisory team such as ours, and we get to work. Once the business is ready to go to market, we begin to create a list of potential buyers. Utilizing all of the information you provided as the goals of the sale, we look for buyers who fit the criteria. If you only want to sell a minority portion of your business, we only look for buyers who are willing to purchase a minority stake. If you need a buyer to step in and take over the day-to-day management of the business, we look for buyers with a hands on approach. If you want your employees to continue with the company post sale, we will do our best to find buyers that will maintain the majority, if not all, of your staff.
Our advisors then vet every interested buyer to ensure they meet the criteria you put in place. You are not introduced to buyers until we think they are a good fit for your company. We may talk to 50 or more potential buyers and only introduce you to a handful. Those buyers you are introduced to will check all or most of the criteria that are your top priorities.
A lot of strategy goes into building and vetting a buyers list. It is not as simple at calling your competitor down the street. You need to know what is important to you in the sale of your business and then let your advisor use that criteria to filter the buyer pool. You also have to have access to find and contact buyers. The buyer acquisition process can take hundreds of hours to truly do it right.
After taking in all of this information on potential buyers, do you know who your buyer is? Probably not. We don’t either but, we can find them for you!