When considering the sale of your business, it’s important to understand the different types of buyers and the unique opportunities each affords. Read on to learn how identifying the right buyer can well position you to maximize your company’s enterprise value and achieve a smooth transition.
Buyer types explained
There are three main categories of buyers: direct competitors, financial buyers and strategic operating companies. Direct competitors are usually the first type of potential buyer an owner thinks about. Financial buyers are usually private equity firms that manage a portfolio of companies within a particular industry. Often overlooked is the strategic buyer, which is usually an operating company whose primary line of business is tangential or complementary to your own.
Your direct competitor may not be your best prospect. Anyone who is already operating in your industry likely has many of your same capabilities. This means the value a direct competitor sees in your company is largely attributable to the customer relationships they may gain from assuming your operations. If this is the type of buyer you seek, make sure you guard against them notifying your customers that your company is for sale. Certainly, you may offer geographic advantages or innovative techniques they don’t possess, but ultimately, the value you bring to a direct competitor is likely limited and therefore so, too, will be the price they offer you for your business.
Financial buyers are predominantly focused on your company’s profit potential and their return on investment. It is not uncommon for these firms to install their own, professional management team post-sale in order to drive results. The purchase price they offer you is likely to be strictly designed to ensure they are well positioned to exceed the hurdle rate their own investors expect.
Strategic operating companies often provide the best growth opportunity and highest premium on your enterprise value because they believe that the value you bring to their operations is essential to enhance their operations and something that cannot be easily built in-house. It is not uncommon for sellers to approach strategic buyers across multiple industries in order to find the right fit.
Opportunities and Obstacles Addressed
In addition to approaching buyers whose operations your company may complement, it is common to identify buyers whose operating strengths will augment your own. If your sales force needs support, a buyer with a strong sales team should be top of your list. That doesn’t mean that once the deal is closed, the new buyer will shutter your existing sales team. On the contrary, it is not uncommon for a buyer to augment their sales force with your own. Similarly, if you have a manufacturing plant in a country that requires you to be established as such in order to sell product in that country, don’t worry about the new market you haven’t yet tapped. Focus on identifying a buyer looking to enter the coveted market you currently control.
Recommendations
Once your M&A advisor has completed a due diligence review, they will be well positioned to make recommendations about what types of companies will value your business most. They should also be able to identify which companies can provide a strong fit with your operating strengths and opportunities, along with an extensive list of prospects. From there, it’s off to the races. Now it’s time to build and circulate your marketing documents and begin to meet with prospects. Let the game begin!
