What Type of Buyer Makes the Most Sense for My Business?

Mark Russell

For some business owners, the answer to this question is not often known at the time they are deciding to sell their business. Why? Because they are not focused on who is ultimately going to buy their business but rather how much money they should expect to receive and over what period of time. For others, the answer to this question is just as critical because they care about what is going to happen to their business and their staff post-transaction.

In order to answer this question, it is important to understand the different types of buyers and how they may impact you and your business post-transaction. There are three types of buyers in the marketplace: Financial, Strategic and Industry buyers.

Financial Buyers – Private equity firms, venture capital funds and other investment groups who have a specific  interest in the seller’s industry but are not seeking to be owner operators.

Benefits

• They tend to work quickly to produce an offer
• They allow owners/management to retain equity post-transaction
• They typically pay all or a majority of their offer in cash at closing – some structure may be required for escrow and to motivate owners to help them ensure a smooth transition post-transaction
• They typically do not make changes to the culture or operation unless management makes specific recommendations or the company does not perform post closing

Drawbacks

• They do not typically acquire 100% of the business – either a majority or minority stake; they also may require owners to retain some equity post-transaction
• They tend to utilize debt financing to help fund the deal, which may burden the company’s performance post-transaction
• They are heavily reliant on the existing management team and will require the key players to execute employment agreements and develop a three to five-year business plan
• They may also need to hire additional personnel to replace retiring owners or beef up the existing management team to execute on the future plan; this could impact the enterprise value paid to owners

Strategic Buyers – Companies that either provide complimentary services or the same services in different markets than the seller.

Benefits

• They typically acquire 100% of a business with all or a majority of the value in cash at closing
• They tend to pay a premium for companies that are strong fits in terms of operational capabilities and work culture
• They have significant resources, additional service offerings, and new client opportunities that a seller can leverage to increase growth and profitability

Drawbacks

• They tend to be heavily reliant on the seller’s management team remaining post-transaction
• Significant corporate cultural differences may exist that terminate discussions during due diligence
• They may decide to change the company name to retain the buyer’s brand and/or not retain certain staff members post-transaction

Industry Buyers – Larger companies within the seller’s industry who are capable of generating synergistic cost savings through integration and potential cross selling opportunities between the respective clients

Benefits

• These buyers understand the seller’s industry and can get comfortable with the business and regulatory environment
• They know how to run these businesses and what to look for in terms of red flags, so deals have a higher probability to close once due diligence is completed
• The sellers tend to know the buyers in advance of discussions, which helps the parties work through deal negotiations and due diligence issues

Drawbacks

• They understand the risks associated with the company and will likely structure a deal to take these into account
• They may absorb the seller’s business into their company to realize the synergistic cost savings, which would cause certain portions of the seller’s staff to be terminated
• Any client/business stream overlap may cause a discount to enterprise value, although some creditors have been more tolerant of increasing market share limits in today’s market

So, if you are contemplating a sale of your business but you do not wish to sell it completely and walk away, a financial buyer may be your best bet. If you prefer to have your company remain intact but want to sell 100% of your stake, a strategic buyer may be better for you. If you wish to sell all of your business but you realize the remaining management may not be strong enough to serve as a platform for a strategic buyer, then an industry buyer may be the best option for you.

It is never clearly defined up front which type of buyer will be willing to pay the highest price for your business. Only going through a competitive process with all types of buyers included will determine that answer. However, if you have certain objectives that need to be met beyond maximizing value, then you should take the time to think about which type of buyer will help you accomplish your goals before you engage in discussions. It doesn’t hurt to include other buyer prospects, but things can get confusing once you start to review offers and compare the pros and cons of each.

Mark Russell manages M&A transactions as Director for Kaulkin Ginsberg. To confidentially discuss your business interests, please contact Mark Russell at 240-499-3804, or by email