Business buyers have varying needs and goals. Typically, buyers can be categorized as individual buyers, financial buyers or strategic buyers.
When you sell your business, it’s essential to keep in mind the type of buyers interested in acquiring your company. As a buyer, it is necessary to identify which type you are and the businesses best suited to your needs.
To sell your business, work with professional business brokers who have experience with all types of buyers and buying circumstances. At Beacon Advisors, our business brokers boast ample experience with different types of buyers in various industries.
Learn more about these different types of buyers; their characteristics, needs, and which ones are best suited to your business.
The 3 Types of Business Buyers
According to the Canadian Federation of Independent Business, we will see three-quarters of Canadian small businesses sold in the next decade. Who will be buying these businesses?
Individual buyers are typically people who seek to acquire a business as a means of livelihood and generally target smaller owner-operated companies. These buyers are often buying to replace their current job, so their focus is on replacing their income source. Often, individual buyers will focus on deals that incorporate bank financing.
You can have peace of mind knowing that this buyer will maintain substantial involvement in your business’s operations after the transaction.
Financial buyers usually are institutional investors or private equity firms who acquire businesses to generate a return for their investors. These buyers may obtain a large company as a platform acquisition or acquire smaller companies as add-on acquisitions if the company compliments a product or service in the PE firm’s existing portfolio.
These buyers are less likely to be involved in daily operations but will grow them quickly to make them profitable. In these situations, the seller may maintain partial control of the business.
Strategic buyers bring an entirely new point of view to the process of valuing a business, whether you are selling or acquiring a business. These buyers are often corporations seeking to acquire other companies in a related industry to achieve synergies and unlock value from a long-term perspective.
Strategic buyers may acquire a business to expand their overall scope of reach, acquire a company’s experienced employees, obtain a larger customer base, eliminate a competitor, or all of the above. The best benefit of selling to this type of buyer is that, due to their ambitious long-term objectives, they are often willing to pay more.
Strategic buyers and financial buyers will often use similar strategies and have similar characteristics in terms of resources and capital. Depending on the size of the business and industry outlook, a business might be a good target for either type of buyer.
What is the Difference Between Financial and Strategic Buyers?
It is essential to note the significant overlap between the strategies and motivations for strategic buyers and financial buyers, making this categorization ambiguous at times.
Financial Buyers: Financial buyers are investors whose primary goal is to achieve a high return rate on their investment. These investors typically buy a business and hold it over a medium-term before exiting the investment. While in charge, these buyers may focus on revenue growth and cost-cutting to increase profitability.
Strategic Buyers: Strategic buyers, on the other hand, are generally corporations that acquire companies that will help the company achieve its long-term strategic goals. They are often willing to pay a control premium if they expect to generate quantifiable synergies. Usually, financial buyers, like PE firms, may acquire a company for strategic reasons.
The Challenges of Selling to Strategic Buyers
In most situations, sellers are interested in finding a buyer who is a good strategic fit for their business for two main reasons.
- All passionate business owners want to see their businesses grow after exit
- Strategic buyers are often willing to pay a premium if synergies are to be achieved from the acquisition.
While this may seem like the best exit option available, it does have its unique challenges:
Experience: Strategic buyers can often be experienced purchasers and will often try to control the sale process and disrupt negotiations to eliminate any leverage that sellers have in the process. Strategic buyers conduct a detailed due diligence process, which is why such acquisitions are often long and tedious. Sellers will spend a considerable amount of time organizing documents for due diligence and answering buyers’ questions. This process could distract the buyer from running the business, affect performance, and be leveraged by the buyer to discount the sale price.
Credibility: Additionally, the seller needs to maintain credibility with the buyer. Overstating projections or understating risks could unnecessarily stretch the process or even lead to the deal falling through, so it is best to maintain transparency.
Confidentiality: A big challenge with this is maintaining confidentiality. Knowledge of a potential sale can raise doubts regarding job security in the minds of employees who, in turn, may spill information to competitors to hedge their risks.
In such situations, it is beneficial to communicate with employees and assure them of future job security. Sellers can incentivize critical employees by offering ‘stay bonuses’ to keep employees from quitting.
Who is the Right Buyer For My Business
The right buyer for your business depends on various factors, including industry, nature of operations, company size, and timing.
Generally, larger businesses with high growth potential and scalable operations are acquired by institutional buyers, while individual buyers acquire smaller owner-operated companies. In determining the right fit, advisors and brokers will consider the buyer’s financial capabilities and ability to take over so that the business’s longevity is protected.
Buyers come in all shapes, sizes and forms. However, they all share a few common threads:
- Motivation to complete a transaction
- The urgency to act now
- Financial capabilities
- Knowledge and ability to take over and run a business
Who Typically Buys Businesses?
While buyers will typically fit into the strategic, financial, or individual categories, a wide range of people and institutions may be motivated to acquire your business.
Forbes describes search funds as “vehicles for entrepreneurs to raise funds from investors interested in making private equity investments.” A search fund refers to an individual backed by a team of investors interested in investing in, buying, and taking a business’s reins.
There are situations where an employee, or more likely a group of employees, can acquire a business from a management team. Employees can be considered a type of strategic buyer. They often have large scale plans to advance a company based on their experience with the business’s strengths and growth potential.
Holding companies are a type of financial buyer as they solely exist to acquire and trade businesses. Also known as shell companies, these buyers do not offer services or products as part of daily operations. Their primary source of revenue comes from acquiring and obtaining a controlling stake in businesses.
This type of buyer is an excellent option if you are looking to partially sell your business and still maintain involvement in the company.
Private Equity Firms
Private Equity Firms are another example of a financial buyer. These firms are funded by investors and individuals with a high-net-worth whose funds are used to acquire businesses.
These investors and individuals are known as limited partners. The firm’s general partners will grow their investors’ acquired companies over several years before selling them.
After selling these companies, the limited and general partners both earn a return. These firms are best suited to businesses looking to fill their full potential. They help maximize your business’s profit in the shortest period and make your business decisions to help it achieve optimal growth before selling.
Private Equity Firms are suited to sellers looking to maintain a portion of equity stake when selling their business.
Like Private equity firms, family offices buy, grow, and sell businesses. The Ivey Business Journal defines a family office as “an entity established or engaged by a single-family or a group of families to manage all of their financial affairs. The focus of the family office is on managing, building and sustaining wealth for current and future generations.”
The difference between the two is that while private equity firms are institutions, family offices provide advisory services for personal wealth management. Family offices invest in businesses on behalf of well-to-do families looking to contribute to companies.
Marketing to the Right Buyers
Understand Your Buyers
To market to the right buyer, you need to identify who will be buying your business. Identify the type of buyers who will best benefit from your kind of business. If you have a small business, you are going to want to market to an individual buyer. If you have a corporation with various divisions, you will consider a more strategic or financial buyer.
Use a Global Network
When you sell a business, you will want to work with a business brokerage that can successfully market your business. Business brokerages like Beacon Advisors boast massive global networks and promote your business listing at a large scale to ensure it finds the right buyers.
To successfully market and sell your business, you will need to identify the buyers who are likely to complete the transaction. Work with a business brokerage to streamline your marketing to trusted buyers that they will screen before proceeding.
Buy Or Sell Your Business With Beacon Advisors
Whether you are a buyer looking to acquire a business or are looking to sell your business, Beacon Advisors can help you. We offer both sell-side and buy-side advisory services to help you throughout the sales process. We advocate for you in negotiations to ensure your best interest is met. Contact us to book an initial consultation.