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Home > Tools and Resources > Selling a Business > What Type of Buyer is Right For Your Company?

What Type of Buyer is Right For Your Company?

By The BizQuest Staff
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Different types of buyers have different objectives and levels of experience. Knowing these differences can help you in getting the deal you want.

As you begin your discussions with potential buyers, it's important to keep in mind that their goals and objectives can vary greatly. In general, buyers can be classified into three major categories: strategic companies (both public and private), Private Investment Groups, and individual investors.

Each buyer type presents a unique set of advantages and disadvantages that can have great impact on the ultimate outcome of the sale. Understanding these differences can help you, both in your negotiations and in finding the best buyer to meet your business and personal goals.

Strategic Companies
Acquisitions by strategic buyers are generally driven by potential synergies 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.

The company 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, these 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, making the ability to relocate the target company an important consideration.

An additional consideration for strategic buyers is the clarity of historical corporate records. Large buyers are particularly sensitive to possible 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 clarified prior to discussions with a strategic buyer.

The advantages of dealing with a strategic buyer include:

Possible disadvantages include:

Private Investment Groups (also known as Private Equity Groups)
Private Investment Groups represent a formal 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 widely. Some groups focus on a certain industry segment, 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 within a specific industry. In any case, the Private Investment 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 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 - usually between five and seven years.

The advantages of working with an investment group include:

Possible disadvantages include:

Individual Investors
Individual investors are high net worth individuals seeking to own and manage their own company. 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.

The advantages of working with an individual investor include:

Possible disadvantages include:

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.

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