Who Will Buy My Business?

business man on computer

Most owners of small and medium-sized businesses do not think too much about exiting their business nor do they plan for that inevitable day. They enjoy their work and their lifestyle. Understanding who the potential buyers are and their respective acquisition criteria equal better preparedness when the time comes to sell. There are three main categories of buyers of privately-held businesses: The Individual Buyer, The Financial Buyer, and The Strategic Buyer. Let’s review each type in greater detail.

The Individual Buyer

The Individual Buyer represents the largest number of prospective buyers for small to medium privately-held businesses. Target companies typically have gross revenues between $300,000 to $5 million. Why? Businesses with gross revenues under $300,000 may not provide sufficient cash flow a buyer needs and those with revenues over $5 million become more challenging for individuals to obtain the level of financing required.

Most Individual Buyers seek a business that has full-time employees in place, a diversified customer base, verifiable financial records, and net earnings at least similar to their most recent salary with upside potential for growth. These qualifiers give Individuals confidence in the business continuity and stability. Employees who can run daily operations are more appealing than a business that is highly reliant on the owner’s presence or is dependent on the owner’s personal relationships with customers. Individual Buyers need to earn a livable salary, pay the debt service on the new loan to purchase the business and provide a reasonable return on their investment. These factors are the ultimate test to see if the price and terms of the deal make sense.

The Financial Buyer

One of the major market shifts for privately-held companies has been the growth in the number of Private Equity Groups & Family Offices over the 10-15 years. The Financial Buyer’s primary goal is to acquire a company, grow it, and then sell it in the future, usually within five to seven years. Their targets usually have a unique business model with a sustainable and defensible market niche and position. Other traits that appeal to the Financial Buyer are strong growth opportunities, a compelling track record, a management team, low customer concentrations, etc.

The Strategic Buyer

The Strategic Buyer is usually a larger company in the same industry, a competitor, or a business in a neighboring industry that could capitalize on the strengths of the company. Their targets are businesses that would complement their own and that by combining the two would create a synergy of operations resulting in lower costs, new customers, employees, etc. Strategic Buyers are the most likely to pay more than other types of buyers because they gain a variety of financial benefits and quick business growth.

Generally, Strategic Buyers target companies that have gross revenues in excess of $2 million, and offer unique market share not readily available to their own company, such as opening in a new market or obtaining product lines and/or services not previously provided, but synergistic to their own customer base. Target companies will be especially attractive in industries where economies of scale are possible whereby the acquiring company can obtain significant post-deal expense savings.

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