When It Comes To Buyers, Know Your Options

So, you're thinking about putting your company on the market for sale or entering into a strategic partnership. Where do you start? An excellent place to begin is by knowing the different types of buyers that are at your disposal, and there are several options. Every buyer will have various reasons for investing in a business, so you need to understand what they are looking for and why. Having a solid understanding of your exit strategy options can help you cash out with the most value and the best deal for the future of your company and your family. 

Strategic Buyers

These buyers are typically experienced business owners or current businesses operating in a comparable or related industry to yours. They may want to expand their operations into other markets, minimize competition, or acquire a product or service that benefits them. 

A strategic buyer typically buys small to mid-size businesses. They usually intend to transform your company as it integrates with their own. Their key concerns may be less than financial performance, management, or branding, but how it can strengthen and benefit their current business. Strategic buyers may be willing to pay extra to purchase your business because they typically have access to capital and particular reasons for wanting your company in the first place. So, when you take your business to market, consider how its qualities could benefit related companies and highlight these valuable aspects. 

Financial Buyers

Financial buyers are unique because they are not typically interested in your industry product or service offerings. This type of buyer is often a financial corporation, such as a hedge fund, or a high-net-worth individual interested in your company purely for financial reasons. Their primary concern is going to be their return on their investment. They typically buy small to mid-size businesses. You must show solid earnings and excellent growth possibilities to appeal to this buyer. And make sure your financial documentation is in order because your financial records can be a dealmaker or a dealbreaker to a knowledgeable financial buyer. 

Individual Buyers

Individual buyers care most about how risky a business is and whether they can secure the financing. They are often entrepreneurs looking to start their companies and tend to have some emotional investment in the venture. They typically look to purchase small-size businesses. 

Often, an individual buyer will be interested in taking on the owner-operator role, giving them a personal stake in your firm and the intention to run it similarly. Because of this motivation, they prioritize particular assets, such as the company's current management team and infrastructure, when they want to buy. If these characteristics are in good standing, transitioning ownership can be simple. So, if you want to maximize your company's value in a transaction (which you do), take any step necessary to improve these aspects of your business. A skilled M&A firm can assist you with this. Individual buyers may have a different purchasing power than strategic or financial buyers. Therefore, consider offering owner financing to make your firm more desirable to them.

Private Equity Firms

Private equity firms—also known as financial sponsors—are investment management companies that raise capital from high-wealth individuals or institutions to buy companies, achieve specified strategic goals, and maximize investment. They will acquire a company, look for ways to raise its value, and then get out via an IPO, merger, acquisition, or recapitalization. This process typically takes between four and seven years. A PE firm's management compensates for approximately 20% of gross earnings. PE companies usually invest in high-performing corporations valued at more than $100 million that are not publicly traded. They are always looking to buy the next big thing. While the benefits of being acquired by a private equity firm can be enormous, the risks can also be relatively high, especially if you care deeply about the long-term vision for your company's future.

Industry Buyers

Sometimes, selling to a financial or strategic buyer is not an option, and you must turn to the competition. Industry buyers know your industry and tend to be a last resort because they usually pay the lowest. Another issue with selling to an industry buyer is the risk of breach of confidentiality. When selling to an industry buyer, enlisting an M&A professional to negotiate on your behalf, build value, and protect the release of confidential information is wise.

Angel Investors

Angel investors typically invest their money in start-up companies that are in their early phases and showing promise but need a proven track record. This makes angel investment extremely risky. They will acquire a portion or all of your company and focus on its success. These investors look for top-notch teams working in promising markets that will give them significant returns on their original investment over five years. According to data from Stanford, angel investors account for 90% of all seed and start-up money.

Venture Capitalists

Venture capitalists are typically extremely wealthy investors seeking to purchase an equity stake in a very successful business that needs their specific connections to grow. Their objective is that their current relationships will benefit the business's infrastructure and marketing, resulting in more money in the future. However, these investments are short-term. It is about investing in your business until it achieves specific target goals, at this point, it can be sold to a corporation or liquidated. A venture capitalist invests in an idea, helps nurture it, and then walks away with a profit.

Employee-Stock Ownership Plans (ESOP) 

An ESOP could be an ideal solution if you're looking for an exit strategy that will keep your firm on track with your ultimate vision for the company once you have moved on. Under such a plan, the company's stock is progressively converted into retirement plans for your employees. A leveraged ESOP gives employees loans to purchase a portion or all of the owner's equity upfront. These programs provide the employees with input and authority, but they also have administrative complexities that could stymie development.

Family Offices

Family offices are much like private equity firms in some ways, but there are substantial differences. These firms spend money on behalf of a wealthy family, frequently in the same industry that made them rich. A family office's principal purpose is to ensure that the family's wealth lasts for generations. For these reasons, they typically maintain more cautious portfolios, invest over more extended periods of time, and play far fewer active roles in their portfolio companies. Because they invest primarily in cash, they often offer lower sale prices than a private equity firm.

Holding Companies

A holding company, a shell corporation, exists primarily to own other firms. Their revenue comes from dividends and earnings on their shares in these different companies. Holding corporations typically want a controlling interest in their firms, making it a simple option to cash out equity in the whole or partial sale of your business. At the same time, others may view it as a trade-off because more people are in power, and you must now deal with board members to make company decisions. 

How Can We Help?

Our M&A experts at Benchmark International would love to hear from you and discuss all your options for getting the most value in the sale of your business. We have global and unique connections that can offer you access to high-quality potential buyers who are serious about making the kind of deal that can fulfill your dreams.