Three Types of Buyers

When selling a business, there are typically three different types of buyers.  These buyers have different levels of sophistication, different access to capital, different needs and will likely all evaluate your business differently.  It’s important to understand who these types of buyers are and the most logical to acquire you so that the right levers can be pulled when preparing for a sale. 

Buyer 1 – The Owner Operator

The first type of buyer one can expect is the owner operator.  This is the corporate refugee who no longer wants to work for a big company and would prefer to own their own business and control their own destiny.  In many instances, this type of buyer is putting a down payment on the business from their personal balance sheet and obtaining a loan from a bank using the SBA loan program.  SBA loans for business acquisitions can go as high as $5 million, so the owner operator is not restricted to small mom and pop businesses. 

Buyer 2 – The Strategic Acquirer

A strategic acquirer is typically a company in the same industry or on the periphery of the business being sold.  They could be acquiring the same type of company in a new geography to expand, they could be looking to vertically integrate by bringing a process in-house that has previously been outsourced, or they could be getting into a new product or service line that can easily be cross-sold with the existing client base.  The strategic acquirer is often looking for revenue or cost synergies with their business.  Strategic Acquirers will often have stronger balance sheets than the individual owner operator as well as existing lines of credit and banking relationships.      

Buyer 3 – The Financial Buyer

The financial buyer is typically not in the existing business of the target company but is looking for investment opportunities.  It is quite often a private equity group looking to deploy capital raised from its limited partnership investors, but this type of buyer also contains the family office and high net worth individuals.  The commonality of the financial buyer is that they are not looking to manage the day to day operations of the business.  The existing management is usually expected to stay on in their existing capacity while the financial buyer sits on the board and offers strategic direction to the company.  In most instances, the financial buyer has a holding period of 6-10 years, so the goal is to either grow the business or cut cost in order to be able to exit at a higher valuation. 

There are no hard and fast rules about who will pay the most for a business as it is very much dependent on the size of the company, ability for the business to scale, industry, and needs of the owner.  Additionally, each type of buyer will have restrictions on how much they can pay or how they structure deals that are caused by their banks, their investment policy, and their culture. Each business owner needs to evaluate a variety of factors to determine where they might hit restrictions for different types of buyers and who can create the most value for the seller.  Once it’s determined, the business can make strategic operating decisions that optimize the company for a sale.