Generally, there are two categories of buyers: inside sales (employees and family) and outside sales (strategic and financial). Each type has its own pros and cons.

An outside sale is the most frequent type of sale. Outside buyers are usually either a financial buyer (bank, insurance company, financial institution, private equity firm) or a strategic buyer (competitor, vendor, supplier, individual, or private equity firm with an existing complimentary company already in its portfolio). Generally, financial buyers have large pools of money. They look at your company as an asset and decide to buy or not buy based on the rate of return your company is likely to generate for them. Strategic buyers look at your product, your market share, your employees, your intellectual property, etc. How they value your company is determined by the return they expect to make once your company is added to theirs.

Outside buyers (competitors, vendors, investors) usually have the money/financing and can pay more to you upfront. The negative, of course, is that they are negotiating the best deal for them . . . and are usually pretty good at it. They are looking to buy something already in place instead of building it themselves. This can accelerate their growth and generate profits through scaling and synergies. The creativity of the deal structure is often limited by the financing agreement, so net savings are more traditional and harder to find. Generally, sellers try to maximize their value and minimize the risk of taxes and collections. Buyers try to minimize the upfront cash and finance the purchase with the projected profits. The only thing both sides generally concede is that they both want to save on taxes. Unfortunately, when there is a tax savings for the buyer there is usually a cost for the seller, and visa versa.

Outside sales include either financial buyers or strategic buyers—both of which are outside the organization. They can be institutions, existing businesses looking to acquire, an individual looking to take over a business, or professional investment groups.

Financial buyers usually will pay less, but have cash on hand; strategic buyers tend to pay more, but the sale price is contingent on the success of the business after the sale.

Financial buyers don’t usually buy businesses with less than $10 million in revenue. They are institutional buyers looking for working companies that show a reasonable rate of return. They want to see a strong management team in place, strong financials, growing revenue, and a profit. Most small businesses cannot show all of these, so very few transactions with these buyers occur

The more typical outside sale is usually to a business owner, an existing company, or an investment group. Examples of these types of buyers are individuals who always wanted to be on their own, your competitor wanting to get into your vertical space, or an investment group with an existing complimentary company in their portfolio that sees a synergy created by taking your company to the next level.

Of the above, it is the strategic buyer, one who is currently running a business and believes that adding your business, product, etc., to his or her company will make it better/stronger, who is likely to pay the highest price for your business. Strategic buyers are willing to do so because they believe that it is cheaper or more efficient to take over an existing company and add it to theirs than it is to start from the ground up and build it. In other words, they believe that by putting two companies together they have improved the value of both companies.

The good news for sellers is that there are effective strategies for both inside and outside sales. A good advisor can assist both sides as to the best approach to a particular sale.