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Traps to Look for When You Sell the Business
Not all would-be purchasers are created equal and nowhere is this more obvious than when you come to sell the business.
When it comes to goal setting, it is often said that short-term pain for long-term gain is a worthy sacrifice. That same approach should be taken when you are considering potential purchasers for the sale of your business. While it brings a degree of discomfort, it is essential that when looking to sell the business you or your broker spend the time to identify potential buyers to find the most appropriate fit.
Just as the scope and focus of each business varies, so too do would-be purchasers; therefore, it is vital that you identify key characteristics in terms of size, budget and experience, to ensure you target and attract only those who are genuinely interested in exchanging contracts—and not just time-wasters.
The four different types of buyers
From my experience there are four different types of buying groups you will encounter in your journey towards selling your business.
1. The first is the ‘mum and dad’-type investor. These are people whose budget is relatively small (usually under the $500K mark) and who are tired of working for someone else, so are essentially looking to buy themselves a job. They are often seeking a complete lifestyle or career change; however, they are typically not as educated or as well versed when it comes to inspecting a business and seeing the value of what’s before them. Because a business is one of the biggest purchases they have ever made, they tend to be a bit more risk-sensitive.
2. Second are the high net worth individuals. They usually have more capital to play with (from the $500K to the $2 million mark), and tend to be well educated and come equipped with a broader skill set. With more of an entrepreneurial spirit, they tend to be less risk averse and enjoy partnering with the outgoing owner to support their transition. These individuals look for businesses where they feel their skill set is going to add value or where they can identify future opportunity to take the business to the next level.
3. The third assortment of buyers are private equity groups and family offices. They tend to come in the form of high net worth individuals who informally come together to buy a business, or formal equity groups that have management or investment analysts already in place. Their buying budget is typically in the $2 million-plus category. As with other types of buyers, these individuals have both pros and cons in terms of suitability. While they are searching for good ROI, they typically want the owner to jockey that business and help them grow it over three to four years—but they don’t want to be there every day themselves. They are happy to sit on a board or participate, but their typical modus operandi is to get in, build up, and look to get out in time for that quick return. They don’t tend to want 100 percent ownership.
4. The final category of buyers are the industry buyers. They appear across all financial groups and typically come in the shape of an existing competitor. They see synergies in cost savings, access to expertise, client base, IP and will typically pay a bit more to secure a business they see strategic value in. Usually they are your ideal buyer.
When you want to sell your business, you should prepare it with an ideal buyer in mind. Identifying which type of ideal buyer you’re looking at will help you work out the return you can get for all your work building it up.
For further information about this article, contact your nearest LINK Business Broking Office.