How do I Find Business Buyers for my Business?
There are several online marketplace services for main street deals targeting individual investors where a seller can post their business for sale. Potential buyers can review tens or hundreds of business descriptions online and then contact the seller or broker to determine if there is mutual interest.
For more significant deals where the target buyers will be private equity firms, family offices, or strategic buyers, there are several different databases a seller can utilize to find potential buyers. Knowing how to match the likely buyer profiles with specific opportunities takes some experience and market knowledge, but this can certainly be learned over a few weeks or months of trial and error.
As with both main street and lower middle market-sized transactions, the difficulty won’t be finding the buyers; it will be in the buyer qualification process.
This is where it is helpful to work with an experienced advisor who can quickly eliminate the looky-loos and bring forward the actual buyers capable of closing a transaction.
Vetting Potential Business Buyers
Unqualified buyers can waste hundreds of hours and delay the opportunity to sell the business. Proper vetting is key to a successful closing.
Buyers who are not transparent about their financing capabilities generally do not have the resources necessary to complete a deal.
First, you will want to quickly ascertain whether a buyer has the financial resources necessary to consummate an acquisition. Acting offended, insulted, or refusing to document proof of funds is not how well-financed business buyers behave.
Ask lots of questions about their past work experiences and plans to see how this opportunity could be a match.
You should also ask the buyer why they are interested in your company and follow up with probing questions to determine if they are interested or simply window-shopping. You don’t want to waste time with buyers who are not serious. You also don’t want to waste time with buyers who don’t have a transparent and credible plan for moving forward with the company.
Types of Business Buyers
The marketplace of business buyers who are potentially interested in buying your lower middle market company comprises eight primary segments. While many segments overlap in some critical areas, all are ultimately unique. By understanding the different segments, their funding sources, their ability to work with existing management, and their time frames, you’ll be better positioned to evaluate the offers and pick a proper match for your company upon your exit.
A search fund needs to find a business within a year or two of its inception, or else it will need to raise additional funds to complete its search. Search funds will look for companies where the search fund manager or managers will operate the business following closing. These are typically very bright MBAs who have a background in either finance or consulting. Most want the seller to stay around for a transition period so the search fund managers can learn the business. Search funds will target companies in most industries, but many are attracted to industries where the business can grow rapidly and sell again in 5-7 years. This future business sale is needed to produce a liquidity event to fund the return required by their financial partners.
Private Equity Buyers
Private equity funds will focus on transactions that fit their limited partners’ investment mandates agreed to in advance. Private equity firms are typically managed as financial companies, with a dedicated fund that targets a specific investment thesis. They often look for deals where the owner will continue to run the business, at least for a few years, until a viable replacement can be identified. Most private equity funds have short time horizons to operate within. They will typically try and fix/improve a business to grow substantially within the 5-7 year holding period. Then the firm will sell the company to generate a return for its partners.
Fundless Sponsor Private Equity
Fundless sponsor private equity firms also have a wide variety of industries they target. Because a fundless sponsor must raise equity capital before completing an acquisition, they often target smaller transactions. The sponsor will investigate many companies that are for sale. When he finds one that looks attractive, the sponsor will then approach his investors to raise funding for the deal. Selling to a fundless sponsor private equity firm will be more challenging as you won’t likely meet the final decision-makers until the very end of the process.
Family offices will look very similar to funded private equity firms in terms of what they look for, but they also tend to have much longer time horizons before they need to sell (if they sell). As a result, they may be perfectly comfortable with businesses that are not growing as fast but generate a lot of cash flow. Family offices will often develop specific industry focuses based on the prior industry experience of the family. Due to their long time horizons, family offices will typically be attracted to stable sectors where they can expect a business to grow and prosper for 15+ years.
Strategic buyers often have specific reasons for their interest in a particular company. Unlike financial buyers (like private equity firms or a family office), a strategic buyer will be interested in more than just the potential financial performance of the business going forward. Strategic buyers might be interested in expanding their geographic presence, their set of product and service offerings, or they might be interested in simply adding additional personnel resources. When soliciting interest from strategic buyers, it is essential first to understand their strategic intent so that you can best determine if a deal will be a fit before getting too far down the road.
Private Equity Financed Roll-Up Platform
A private equity-financed roll-up platform company is typically looking for smaller acquisitions it can consolidate to do a more significant overall business. This approach is generally called a “roll-up” strategy. As a result, these buyers will be looking in the same or a related industry and might be less concerned about the seller’s management staying on because they have their management in place. Valuations can also be high from this type of strategic buyer. Much of the overhead expenses can be consolidated, resulting in increased cash flow vs. the standalone company.
As a strategic buyer, a competitor is likely looking at an acquisition because it wants to eliminate a competitor and make its market presence that much stronger. Competitors can be down the road or across the country. It depends on the type of business you own and the specifics of your industry. While the valuations can also be high, as much of your overhead expenses can likely be consolidated, the approach and negotiations can be tricky as it is virtually impossible to get through the process without disclosing proprietary information.
Individuals – Owner/Operators
Individual business buyers are looking to purchase a business that they will run on a daily business. In effect, they are looking to buy themselves a job. Most will require a loan from the Small Business Administration (SBA), which carries very stringent requirements that will affect the buying process. These requirements will set many of the deal terms and structures offered. Typically these buyers will look for acquisition candidates within industries with considerable operational knowledge. These are also usually buy-and-hold investors, which can be attractive to lifestyle company owners who have a solid connection to their employees and customers. By selling to an owner/operator, your legacy can be expected to evolve rather than abruptly be changed by outside owners who have little daily interaction with customers and employees.
Financial Buyers vs. Strategic Buyers
Financial buyers are investors that are interested in the return they can get from buying a company, while strategic buyers are typically companies in your industry or a related industry. Therefore, the financial buyer is looking for a return on their investment and is interested in your company mainly from a cash flow perspective. Working with a financial buyer is like getting a loan from a bank. It is all about the numbers.
Therefore, the strategic buyer is looking for a complementary offering to sell to their existing customer base and is looking at your products, employees, or customer list. The interaction will be more like a traditional sales call where they will ask questions about your company, products, and staff.
Both are good strategies and will slightly change the potential deal terms and business valuation calculations. The buying process will typically emphasize a financial or product focus, especially during the due diligence phase.
Strategic buyers can typically afford to pay more for the company. The strategic buyers will expand the given potential of the business dramatically. They will either have a large existing customer base, a competitive product offering, or another way of taking the product you already have and drastically increasing distribution and sales revenues.
Financial buyers will also seek to expand the business, but their approach will typically be to apply more financial resources to accelerate the results from existing processes. For example, if your inside sales team is currently profitable and staffed with three people, they may try to hire and staff the department with another three people to double sales revenue. Suppose product integrations or missing key features are the barriers to more sales. In that case, they will add additional engineers to the development team so new features can be released faster.
How do Business Buyers Make their Decisions?
Most buyers look at hundreds of opportunities a year. They follow a common sense process for making their decision to complete an acquisition. Most qualified buyers start with an acquisition screen to quickly eliminate opportunities that are not a fit. An acquisition screen sets forth parameters or criteria that will help a buyer promptly determine whether a deal will be worth spending more time on.
The criteria used in an acquisition screen might include the target company’s size, geography, industry focus, management team dynamics, financial results, growth history, and other factors.
The most focused buyers can quickly tell business owners whether their company will be of interest.
Assuming a company is attractive to a buyer, they will sign a nondisclosure agreement and get additional information about the seller’s company. This information typically consists of a Confidential Information Memorandum that presents the business, financial records, and other essential documents necessary for the buyer’s initial business evaluation.
Suppose the buyer continues to be interested after its initial review. In that case, it will put together an offer letter for the business that details the proposed price and various terms of an acquisition. If the seller and buyer can come to terms, the buyer will start much deeper due diligence on the seller’s business.
Not all deals will be closed, even after a successful due diligence process.
For individual buyers, the decision to close the transaction after due diligence is then made. For private equity investors, approval from their investment committee is required before closing. The committee is usually comprised of partners in the private equity firm. For strategic buyers, depending on the size and materiality of the transaction, the transaction might need to be approved by the board of directors, or if it is smaller, the management team might be able to support the transaction without needing to get board approval.
Before going down the path of due diligence and legal agreement negotiations with a buyer, ask them about their internal approval processes to know when certain milestones have been reached and can better assess whether the buyer will be able to close the transaction with you.
How to Sell Your Business to a Competitor
As a business broker, I am very cautious when approaching a client’s competitors as prospective buyers; they can often be perfect candidates if handled with extreme care. Competitors see value in the future cash flows of the acquired company; they may also be able to enjoy a better position in the market by eliminating a competitor.
Moreover, competitors may be able to leverage their existing infrastructure to reduce the overall administrative costs of the combined entity, allowing them to pay a premium for an acquisition over fair market value.
I like to approach competitors only late in the sale process after we have had a chance to test the rest of the market and have a few other offers. Going to a competitor has more real and significant risks than other potential buyers.
For example, suppose a sale is explored but ultimately does not occur. In that case, a competitor now has information about your company that could be very detrimental to your ongoing operations if misused. Moreover, although everyone reviewing your company and its records should be bound by a signed confidentiality agreement, practically, you should expect some of your secrets to leak out. This could be challenging for your company if word of an acquisition leaked to your employees, customers, or suppliers. As a result, we typically recommend going to competitors only after exploring other alternatives first.
Selling a business requires a considerable amount of research and planning. An experienced advisor can help you through the process by identifying qualified buyers and helping you negotiate the best deal possible.
Contact me today to learn more about my services and see if I can help you find a qualified buyer for your business.