How well do you understand your potential business buyers?
If the answer is “not very well,” then your odds of conducting a timely sale at your preferred price are diminished. Understanding the most common business buyer personas is one of the most overlooked aspects of a successful business sale. This is because each potential buyer typically has a specific roadmap for strategizing, operating, and growing a business.
Parties looking to buy a business in CT, NY, MA, or RI generally come in four distinct categories. In this post, we’ll detail these four buyer types and discuss their primary concerns and motivations.
This explanation will help you tailor your sale opportunity to encourage a fast exit on the most favorable terms possible.
The Strategic Business Buyer
Strategic buyers are business owners who acquire another company in the same industry or related industry. Generally speaking, these are full ownership acquisitions, with the seller often exiting the business after a transition period.
If you’re pursuing strategic buyers, it’s imperative to take steps to enhance the value of your company before entering negotiations. Business owners who can lower operating expenses without adversely impacting revenue or profits will have greater leverage at the negotiating table. This is critical because strategic buyers are typically well-informed about the industry. Buyers of commercial property who already operate in your space (or in a related niche) have a thorough understanding of the relevant market dynamics. They are also in a stronger position to know how to value a business in your industry, so it’s important to ensure that any weak spots are addressed before exploring a sale.
Strategic buyers will typically buy all business assets as well as existing equity, although this isn’t always the case.
The Private Equity Buyer
Private equity buyers offer capital in exchange for an ownership stake in the business. The amount of the stake is variable, anywhere from a small fraction of a company to a full buyout.
Private equity firms typically take ownership stakes with an eventual exit already in mind. The goal, in most cases, is to sell the stake they acquired for a better price within five-to-seven years. Meanwhile, business owners often retain either controlling or minority interest in their firm following an equity sale.
Private equity buyers are squarely focused on generating the best possible return on their investment and may take a more limited operational role within an invested business. These buyers also have a finely-tuned understanding of risk vs. reward and may submit a lower buy offer based on this assessment.
Sellers should be aware of this tendency and mitigate it by de-risking the business. This can be accomplished by ensuring that written agreements are in place for all key business relationships; properly incentivizing top employees, identifying and registering all intellectual property, and demonstrating full legal and regulatory compliance.
The Management or Employee Buyout
Management or employee buyouts occur when employees come together to buy a business from current management.
This is typically one of the easiest business sale transactions to conduct. Employees know their business better than just about anyone, giving them a privileged perch to evaluate the competitive strengths, weaknesses, and overall value of a firm. Employees also have a keen understanding of potential growth opportunities, which can make them motivated buyers in many cases.
These types of sales are also notable for the benefits provided to buyers in terms of limiting uncertainty and disruption. Business sales can be unsettling for existing staff members, who may worry about the impact a sale will have on the company or their jobs. When the company is purchased from within the organization, employees know exactly who is taking over the business and have peace of mind knowing that they are in good hands.
Management buyouts are often financed with loans, but they may also be financed by placing a portion of employee salary and benefits into a stock ownership fund. Once an adequate number of employees participate – or the fund is sufficiently capitalized – the ownership transfer can take place.
The Individual Buyer
Individual or solo buyers typically acquire a business with the expectation that it will provide them with a significant source of income or compensation. These are often people who want to own a business but don’t have the time or entrepreneurial skill to build it from the ground up.
Individuals buyers often seek outside financing from banks, investors, or other third parties to complete a transaction.
Because individual buyers often rely on newly acquired firms to provide immediate cash flow or income, they tend to be focused on short-term operational concerns and revenue streams. Sellers should ensure their businesses are operating as smoothly as possible, as any disruption threatening short-term revenue could be a deal-breaker for an individual buyer.
Understanding the different types of business buyers is vitally important when it comes to selling your business at your preferred price.
By learning what motivates buyers – and understanding the concerns specific to each buyer category – you can tailor your opportunity to generate maximum interest.
Are you interested in selling your business? VR New Haven can help. We are a top CT business broker firm that is dedicated to helping buyers and sellers at every step of the transaction process. Contact us today for more information or to set up a meeting.