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
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.