Are you thinking of selling your business? Do you think the business would fare better under new leadership? Or perhaps selling has always been your proposed exit strategy? Regardless of the reasons you’re selling your business, one thing is certain – you want the best buyer possible. For this reason knowing how to identify and distinguish between the different types of business buyers will go a long way in saving you both time and money. In order to better understand the buyer let’s take a closer look at the different buyers and the pros and cons of selling to them.
1. Selling to a competitor
- Type of business buyer: Competitor
Sometimes a competitor may make an offer to purchase the business from you or you may initiate the conversation. If they approach you first they might be looking for a possible merger. One of the major reasons mergers and acquisitions take place is the desire for growth, expansion, and possibly monopolizing the industry. The advantages of selling to a competitor include peace of mind knowing that the buyer is qualified; potentially receiving a higher offer price and the buyer getting faster access to financing because they are already a proven business. Associated cons may be that your competition isn’t interested in ensuring business legacy or taking care of your employees and existing customers. Also, the competitor now knows you are thinking about selling and could use this information against you in the marketplace which could have a significant impact on the value of your business.
- Selling to an investor group
- Type of business buyer: Investor Group
When selling a business, you may be approached by an investor group. Investors by nature are looking for opportunities where they can make money while assuming as little risk as possible. Additionally, buying an already established business means immediate cash flow and eliminates the pressure of having to start from the ground up. By purchasing a financially sound and mature business, investors will have skipped the initial startup phase where little to no income is generated. These are the aspects you as the seller need to play up during your talks with an investor group.
3. Selling to a strategic buyer
- Type of business buyer: Strategic Acquirer
Among the different types of business buyers you’ll come across are strategic buyers and financial buyers. According to a 2016 Private Capital Markets Reports, 57% of all businesses sold in 2015 were bought by strategic acquirers. Why is this? On average, strategic buyers tended to pay more when closing deals than financial buyers making them the preferred buyer. PriceWaterhouseCoopers (PwC) echoed the sentiments and encouraged sellers to seriously consider selling to strategic buyers because such transactions allow the seller to receive the most liquidity once the deal is closed. As with all things there are disadvantages to be had. The biggest cons of having your business acquired by a strategic buyer involve role duplication and possible dilution of customer and employee loyalty.
4. Selling to a private equity group
- Type of business buyer: Private Equity Group
If you’re not ready to completely let go of the business and don’t mind staying on and helping to grow the company with the help of a backing partner then the type of business buyer you’re looking for is most likely a Private Equity Group (PEG). The PEG will purchase a portion of the business (probably a majority stake) leaving you as the seller with the remaining part. Done right, you can still exit lucratively in the future when you’re ready to let go completely. If you’re looking to sell but not ready for a full exit, then a PEG might be a good fit. 90% of PEGs will not involve themselves in the day-to-day operations of the business but will provide you with financial resources, human capital, ideas as well as experience to manage the firm.
5. Selling to your employees
- Type of business buyer: Employees
Selling a business to employees is actually not very common but it can happen. Selling to current employees has many advantages which include the fact that they already have a good appreciation of the company’s ethos and brand identity. There will be continuity as the customers and vendors know the employees already. In addition, the employees will still have a job which is something that’s not guaranteed if you sell to another buyer. On the downside, because they are already privy to the dysfunctional aspects of the company you may need to negotiate a lower selling price. Probably the most imminent challenge for the employees will be getting the finance needed to buy the business from you. Proving they have a good enough credit score to lenders will be the major hurdle.
6. Selling to your family members
- Type of business buyer: Family
Perhaps you don’t wish to sell the business to outsiders but wish to keep it within the family. In this case, you can approach family members and make the proposal that they buy the business from you. When it comes to the different types of business buyers, family can be the most difficult to deal with. It must be mentioned that selling a business to family members is not always the easiest route. Difficulties may arise if members cannot secure the necessary finance from lenders outright and alternative payment options like seller financing are entered into. Regardless of how well you trust your family, treat them like any other buyer. The only way to avoid future problems is to ensure you’ve sold the business by following the necessary state laws and got the paperwork to prove it.
Talk to a legal expert about selling your business
Would you like to discuss selling a business with an attorney? Get in touch with one of our advisors to learn more about how Sun Acquisitions can help during the buying and selling of a business.
Disclaimer: Any information provided in this blog is not intended to replace legal, financial, or taxation advice given by qualified professionals.