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Who’s the Buyer for Your Business? - It May Impact Value Significantly

When looking to sell your business, it is of critical importance to determine early on in the process to whom you will be looking to sell the business.  The potential buyers for a business primarily fall into three different categories:  (1) Corporate or Strategic Buyers, (2) Financial Buyers and (3) Related or Internal Buyers.  Each of these potential buyers will yield a different value for your business (known as “value relativity”) which will directly impact the amount of proceeds you will receive in the event of a sale.

Corporate or strategic buyers consist primarily of competitors, suppliers, customers or other companies within the subject industry.  As part of the purchase, strategic buyers look to obtain additional customers, larger market share, new technologies and intellectual property.  Also, these companies will typically be able to realize certain synergies as part of the purchase of the business.  Synergies result from the fact that the buyer will be able to take advantage of an increase in revenues through the purchase, but will not necessarily incur all of the expenses associated with earning these revenues.  Because of the expense savings, and the corresponding increase in cash flow associated with the strategic purchase, the corporate or strategic buyer will, often times, be able to pay a premium for the business.

Financial buyers consist primarily of private equity groups, venture capital firms and angel investors that purchase businesses as part of an investment strategy focusing on value maximization.  Financial buyers will often have access to pools of capital with which they can purchase companies or make investments in companies.  However, financial buyers will usually have certain investment return requirements as part of their investment strategy that may limit the amount they are willing and able to pay for a company.

Related or internal buyers consist of the employees or management group of a seller or the family members of an individual seller.  These individuals often have an intrinsic interest in the business given the fact that they have worked at, or have been associated with, the business, often for a long period of time.  These buyers have a vested interest in the business operations continuing, but often have limited access to funds with which to purchase the business.

There are positive and negative aspects to selling to each of the potential buyer groups discussed previously.  The strategic buyer will often be able to pay the most for your business, but there may be uncertainties as to what will happen to the current employees and management group.  Also, sellers will occasionally be reluctant or outright refuse, to sell their company to competitors or others within a particular industry.  Financial buyers are able to be competitive in their offers to purchase a business, but if the financial buyer does not specialize in purchasing or investing in companies within a specific industry, questions may arise as to the effective and efficient operation of the business going forward.  Selling to related buyers may provide the seller with the most comfort, knowing that the business is going to be operated by familiar individuals that have been involved with the business in the past.  However, the seller must be comfortable knowing that they will typically receive less (sometimes far less) for their business if they sell to an internal buyer than if the business was sold to either a strategic or financial buyer.

It is important for the seller to start planning early to sell their business (usually 3-5 years prior to their planned exit), and consider all potential buyers and the issues associated with each to determine the best fit to market the business for sale.  If you are considering selling your business, please feel free to give our experienced M&A professionals a call to assist you in this process.

For additional information contact the author Randall Raifsnider at rcraifsnider@herbein.com.