The past 2 years have been a wild run for business owners, employees, customers, and vendors. For many business owners, its time to get off this roller coaster, but who are the types of buyers in this volatile economy?
To position a company for sale and receive as many offers as possible, we consider the three buyer personas for small/mid-sized businesses:
- Financial
- Strategic
- Synergistic
Each buyer persona will have different motivations, growth goals, and investment criteria.
The Financial Buyer
A financial buyer purchases a business based on right-sizing revenue, EBITDA, buy-side financing, and owner’s take-home earning potential. This type of buyer may have an interest in growing and flipping the business, but that takes a second priority to generate an income for the owner and their family. Oftentimes, the buyer is a single person or couple with experience in the industry who now wants to no longer be an employee and become an owner.
The Strategic Buyer
A strategic buyer purchases a business to complement their existing business or portfolio, or add to their platform. This can be based on geographic territory, integrating a more vertical supply chain with a buy vs. build approach, or limiting competitive pressure in the same product/service category. These buyers may offer less than a financial buyer, as they likely have experience within the industry and have systems, processes, and operations already in place. Competitors fall within the strategic buyer category, so a seller should be careful not to disclose any trade secrets during the buyer vetting process, limiting the disclosure of proprietary data until the very end of the transaction.
The Synergistic Buyer
A synergistic buyer will have the largest appetite for a premium purchase price and the best flexibility to pay cash to close an acquisition. This buyer looks at acquisition as an inorganic growth method to increase revenue and profits through access to new products, distribution networks, supplier base, and intellectual property. This is where the secret sauce previously mentioned in the mitigating risk section can drive a stronger asking price.
Understanding the motivations of the ideal buyer should influence the necessary changes a business owner can undertake to make the business more attractive. This could include diversifying the customer base, building supply chain resilience domestically and abroad, or creating a more robust management team. While it is a sound strategy to “fish in multiple ponds” when it comes to selling a business, a business owner should strategize on who the most likely buyer might be and weigh against what buyer is likely to provide the highest asking price, best terms, and operations fit.
In general, private equity only takes interest in buying small/mid-sized businesses at the $1M EBITDA level (unless it’s an ‘add-on’). The reason behind this rule of thumb minimum is that companies producing less than $1M EBITDA cannot, in general, seamlessly function without ownership taking on many different roles and tasks, so transitioning to a new ownership and management team can be extremely challenging. For companies producing less than $1M EBITDA, buyers are likely to come from wealthy individuals looking for a career change, competitors, or adjacent businesses with a strong balance sheet looking to expand.
If you are looking to sell, reach out to our team and we are happy to discuss the most likely buyers and run some rough numbers on the total number of unique buyers we can target for your business.
