The Buyer Bulls-eye: Selling Your Business for the Highest Value
By Domenic Rinaldi, Managing Director of Sun Acquisitions
When it comes time to sell a business, an owner quickly realizes that not all buyers are created equal. Some buyers will place more value on intangible assets and goodwill than others, which can drastically affect the perceived value—and ultimately the purchase price—of the business.
Generally speaking, buyers fall into categories that can help us understand their tendency to pay more or less for an acquisition. While their tendencies will vary in each situation, it is helpful for sellers to be aware of these types of buyers in order to target those that may offer the highest value for their business.
The general rule that follows is that the buyers who are closest to the business will be willing to pay less than those who are further from it. Imagine a bulls-eye with the business in the center. As each level moves outward from the center, the perceived value of the business increases.
At the center of the bulls-eye are buyers who are already a part of the business—employees. Because of their company knowledge and often their loyalty to the business, it is common for employees to step forward as potential buyers. However, employees generally offer the lowest bids for the purchase of the business.
Employees are often lacking the money and resources necessary to offer a higher bid, but they also have a lower perceived value of the business. They already have a deep working knowledge of the company, its operations, and the industry; therefore, they won’t pay a premium for access to that information.
Courting an employee buyer can also present some challenges and risks. Employees tend not to have the sophistication (and, as mentioned, the financing) to consummate a transaction. If the deal falls through, news that the company is for sale may leak to others, causing panic or stress. Worse yet, the failed deal may leave the employee buyers feeling slighted or upset, creating additional risk.
As you move outward from the center of the bulls-eye, the next layer would be reserved for competitors. Competitors are the closest to your business without actually being affiliated with it. While they often have greater resources and sophistication than an employee buyer, they also already know the industry and have their own operations figured out. Similar to the employee buyer, a competitor will not place significant value on the intangible assets and goodwill, often causing them to bid lower.
A competitor’s interest in the purchase of a competing business would be solely focused on gaining additional clients. They may even look for ways to eliminate your existing employees and operations in an effort to devalue the business and get a better price.
Entering into a deal with a competitor is also extremely risky. Your competitor will likely gain access to important proprietary knowledge about your operations in the deal process. If the deal falls through, your company could be at significant risk. If you do choose to pursue a buyer that is a competitor, you should always work with experienced advisors such as an attorney and a business broker who can ensure the deal is structured to maximize value and protect the business.
High-Net Worth Individuals
The next group of potential buyers is high-net worth individuals. These buyers have the financial resources to fund the deal without the risks of employee or competitor buyers. In many cases, they are looking to “buy a job” or displace the previous owner. Because they often do not have the industry or operations knowledge necessary to run a successful business on their own, they tend to pay extra for goodwill, trained employees, a solid client base, and other value-adds.
But while it’s possible to extract decent value from high net-worth individuals, they probably need a lot of training and guidance to get up-to-speed—a task which usually falls to the seller. It’s important that the seller is prepared for a more involved transition with this type of a buyer, and experienced business advisors can help to navigate any issues that may arise.
Private Equity Groups (PEGs)
Further from the center of the bulls-eye, private equity groups (PEGs) are highly sophisticated buyers. They know how to make an offer and structure a deal that works. In some cases, the PEG may operate competing businesses or have a portfolio of companies in related industries. They have access to money and lender relationships, which make them better able to close a successful deal than many others.
PEGs tend to be financially motivated and operate on a strict return on investment model. When acquiring a business, they will have a specific amount of return in mind. The downside for the seller is that there will usually be a cap on what a PEG is willing to pay for a business in order to ensure they can obtain their expected return. That said, they generally make high offers that value goodwill and the business’s assets.
Strategic acquirers are owners who operate a business that complements the one being acquired. For example, their sales force may call on the same clients, but they do not sell the same products. In other cases, they may sell similar products, but operate in a different geographic region. Either way, strategic acquirers will often pay the highest premium of all buyer types for an acquisition, because there is more strategic value in it for them than for most other buyers.
Often, strategic acquirers see some overlap in their own business and the one they intend to buy. There may be opportunities to eliminate some facilities or employees to lower overhead and improve profitability. This, along with the desire to grow an existing book of business into new or expanded markets, motivates a higher purchase offer.
Finding the Right Buyer
It’s important to understand that not every type of buyer will exist for every business on the market. For example, private equity groups tend only to deal with larger companies, which may limit the field for a smaller company. Your options when finding a buyer will depend largely on the size of your business, the industry, and other market factors.
Regardless of the type of business you are planning to sell, it is highly recommended that you find an experienced business broker or advisor to help you navigate the marketplace, highlight your assets, and get the highest value for the business you worked so hard to build.