Who will buy my business?
There is a variety of different investors that can buy your business and it’s important to be thinking about what your ideal buyer looks like. The most common types of buyers are private equity funds, strategic buyers and individual buyers. Let’s take a look at each one of these and dive into the different characteristics to consider.
Private Equity Funds
A private equity fund invests directly in companies, by either purchasing private firms or buying controlling interest in publicly traded companies. The primary goal of a private equity investment is to generate high returns for their limited partners, usually over a 5-year period. They accomplish this, for example, by purchasing a company by putting 10% down in cash and financing the rest with debt. Over the 5-year period, they will pay off the debt using the profits generated from the business and then sell the business at the end of 5 years to realize a massive return. Let’s look at the benefits of a private equity buyer and also some things to keep an eye out for.
Advantages of Private Equity
Large Amounts of Funding: Private equity can provide large amounts of money to businesses to help them avoid bankruptcy in hard times and to grow rapidly when things are going well.
Active Involvement: Private equity investors are more hands-on than alternative forms of investment to help you re-evaluate every aspect of your business to see how you can maximize value.
Incentives: It is in the best interest of the private equity fund for your business to succeed. They have invested a lot of borrowed money and liquid capital to your business.
High Returns: o you’re The combination of major funding, expertise and incentives can be very powerful. A study from the Boston Consulting Group found that more than two-thirds of private equity deals resulted in the company’s profits increasing by more than 20%.
Disadvantages of Private Equity
Dilution of Your Ownership Stake: If a private equity firm buys your business you will be bought out of your company eliminating your ownership. This means you will not participate in the monetary benefits produced after the private equity firm sells the business in 5 years. Private equity can provide large amounts of money to businesses to help
Loss of Management Control: Usually after private equity purchases your business you will lose control of the direction of your business. The private equity firm will want to maintain control and stay actively involved. This means losing control of some basic elements of your business like setting a strategy, hiring and firing employees.
Different Definitions of Vale: A private equity firm exists to invest in companies and their definition of value is very specific. It’s focused on the current financial value of a business and what that value will be on a future date, usually in 5 years. A business owner values the long-term view of the company with more concern for things like relationships, employees, customers, and reputation.
Eligibility: Private equity firms are looking for particular types of companies to invest in. They have to meet certain requirements such as size, industry, location and profitability. This results in private equity investors being highly selective of the business they buy.
A strategic buyer is a company that acquires another company in the same industry to capture synergies. The strategic buyer believes that the two companies combined will be greater than the sum of their separate individual parts and aims to integrate the purchased entity for long-term value creation. Let’s look at the advantages and disadvantages of a strategic buyer.
Advantages of a Strategic Buyer
Premium Price: Due to the increased value created by the two companies combined, a strategic buyer is usually willing to pay a higher value in order to close the deal.
Faster Transactions: Since a strategic buyer operates in the same industry, they are knowledgeable about the market and know what types of companies they want to acquire.
Longevity: By selling your company to a strategic buyer, the original owner has greater assurance that your business will be in good hands for the future. Whereas a financial buyer acquiring your business to sell in the near term.
Beneficial for Stakeholders: A financial buyer makes decisions by prioritizing the interest of investors. In contrast, a strategic buyer makes decisions based on the interest of all key players involved: shareholders, clients and employees.
Disadvantages of a Strategic Buyer
Employee Loss: Merging two companies together can cause role duplication, especially at the management level.
Culture Change: Often times the acquired company will have to morph into the strategic buyer’s company culture, which can be vastly different.
Failed Transaction: If the strategic buyer decides not to purchase your business after due diligence, they may have gained valuable information that could potentially pose a threat.
An individual buyer is an entrepreneur like yourself who is motivated by a desire to run his or her own business. They can appear from a variety of different backgrounds. Sometimes an individual buyer will have management experience in a corporate environment and wants to be a first-time business owner. Other times an individual buyer is someone who started a business, successfully sold the business and is seeking to purchase another business.
Many individual buyers are interested in working as owner-operators, so this type of buyer will probably have a personal interest in your product/service and will very likely continue to run your business in much the same form.
Advantages of an Individual Buyer
Quick Communication/Decision Making: There is a lot of information that needs to flow back and forth between a buyer and seller during a transaction. Strategic and financial buyers work at large firms where communication can lag and decisions might drag out. In contrast, an individual buyer can quickly and efficiently respond to keep the deal moving forward.
Less Negotiation Involved: Strategic and financial buyers have strong business acumen and experience buying companies. They will use this knowledge in an attempt to knock down your price. Individual buyers usually don’t have this pedigree of negotiation experience.
Healthy Transition: Individual buyers are solely focused on successfully running your business. This means it is in their best interest for the business to achieve long-term success.
Ongoing Involvement: Most individual buyers will want you to stay on board after the deal closes as a paid employee or contractor to ensure a smooth transition process. This enables you to earn more compensation beyond the closing table.
Disadvantages of an Individual Buyer
Lack of Pricing Power: Often times an individual buyer will not have the same financial resources that a strategic or financial buyer has. Therefore, the individual buyer can’t afford to pay a premium for the business and will usually have to obtain financing to purchase the business. This allows the lender to assess the risk and determine a fair value for the company.
Post-close Training: An individual buyer may not have the direct experience needed to successfully run your business. Therefore, the seller will have to train the new buyer on how to run the daily operations.
Unfamiliar with the Transaction Process: Individual buyers are not familiar with business acquisitions which can create more work for the seller and/or business broker to help them through the process. There are various costs involved with purchasing a business that might come as a surprise to the buyer.
No Reputation: Strategic and financial buyers take a more professional approach when identifying businesses to purchase. These buyers will communicate if they want to pursue a transaction or let it pass. Individual buyers on the other hand can leverage their independence to show more unpredictable behavior making them harder to keep engaged.