Different buyers have different objectives and levels of experience. Understanding these differences can help you in getting the kind of deal you want. As you begin discussions with potential buyers, it’s important to keep in mind that buyer’s goals and objectives vary greatly. In general, buyers can be classified into three groups:
- strategic buyers (public and private industry competitors)
- private equity groups
- individual or “angel” investors
The valuation you get for your company will vary based on the type of buyer:
As the graphic shows, individual investors generally value companies at the lower end of the valuation range. Strategic buyers value on the higher end of the range. Private equity funds can value low, depending on the fund and whether your company is the first one of its’ kind in their portfolio OR they can value high if your company is viewed as an add-on or adjunct to a company they already have in their portfolio.
Each group presents a unique set of advantages and disadvantages that can impact the sale. Understanding these differences will help in your negotiations and in finding the buyer best-suited to meet your business and personal goals.
Strategic buyers are driven by potential synergies and associated cost savings between the acquirer and the target entity. For example, you may have a product or service that the buyer lacks, but is highly complementary to their product or service offering. Or, you may have an established presence in a certain geographic or customer market that the acquirer has had difficulty penetrating.
This focus on synergistic value may result in higher offers from this buyer group than from others, since the operational efficiencies that are created can provide immediate higher profitability and a more rapid return on investment for the buyer. Public and private strategic buyers differ in that the liquid market for public company shares may create a more aggressive valuation for public firms over those that are private. This may allow the publicly traded company to pay a premium price for your business, especially if you’re willing to accept a stock-for-stock transaction. However this is not always the case as private strategic buyers today have access to capital at historically low cost.
Corporate structure after the sale may also differ with a sale to a strategic buyer. For instance, unless management is viewed as absolutely critical to maintaining company performance, strategic buyers generally don’t require that the active, selling shareholders remain with the company much past a short transition period (generally six months to a year). Also, depending upon the size of the target and the logistics involved, the buyer will oftentimes completely absorb the target company into its current operations—disbanding the old company’s operations—making the ability to relocate the target company an important consideration.
An additional consideration for is the clarity of historical corporate records. Large buyers are particularly sensitive to potential liabilities (licensing issues, outstanding contracts, taxes, etc.) that they may become liable for upon purchase. Therefore, as is the case with virtually all transactions, it’s recommended that any outstanding issues be identified and clarified prior to discussions with a strategic buyer.
Private Equity Groups
Private Equity Groups represent a formal investment fund (or a number of related funds) created by a group of investors for investment in, and purchase of, closely held businesses. The strategy and focus of these groups varies. Some groups focus on specific industry segments, while others are more concerned with the geographic location of the target. Certain investment groups may achieve the same synergies with an acquisition as corporate buyers, particularly if the group is building a portfolio of businesses for a “platform” company within a specific industry. In any case, the private equity group’s primary focus is to achieve the highest possible financial return for its investors.
Since investment groups generally prefer to let their portfolio companies continue to operate on their own, the preference is for the existing management team to remain intact and continue operating autonomously after the sale. Additionally, these groups usually have a planned exit strategy and expect to hold a portfolio business for a pre-determined period of time, which usually is between five and seven years.
Individual or “Angel” Investors
Individual investors are high net worth individuals seeking to own and manage their own business. Individual buyers expect to be integrally involved in the leadership and management of the company after their purchase. This buyer segment is usually more focused upon the geographic location of the target than its industry, as the buyer is typically not seeking to relocate.
Most individual investors are seasoned businesspeople, with experience in either corporate positions or other entrepreneurial ventures and ordinarily prefer established businesses with proven performance to newly started companies. Due to capital constraints, individual investors usually purchase businesses at the smaller end of the middle market spectrum by performing leveraged buyouts that often include seller financing.
Keep in mind that the payment portion of a buyer’s offer should not be your only focus in a transaction. Your understanding of the buyer’s ultimate plans for the business, their expected level of involvement and network of resources, are all important considerations. Knowledge of a buyer’s expectations for the business can be highly beneficial for both negotiations and the closing of a successful deal. You need to be concerned about both the pricing and the terms of any deal, and choose the alternative that suits you best.