Which type of buyer is best for you?
This article is Part 2 of a 3 Part series of articles related to the sale of businesses. These topics are covered in detail during “The Business Sale Solution™ Seminar,” a must-have resource for any CEO or Business Owner. Part 1 addressed, “The #1 concern business owners have about selling their business.” The #1 concern is business valuation – “What is the value of my company? How is it valued? And if it’s not valued high enough how does one increase company value?”
So, now that you understand that Valuation is the #1 concern business owners have about selling their business, another concern is “which type of buyer is best for you”?
There are three types of buyers, outsiders, insiders, and the public. The subsets of these categories, Outsiders are strategic buyers, financial buyers, and private equity groups. Regarding Insiders, there are ESOPs, management buyout and transfer to family members. The third buyer type is the Public (IPO).
Strategic buyers. They usually offer the most amount of money when purchasing a company. What are their motivations? What causes them to buy companies?
A Strategic buyer is looking to capture market share, or maybe expand to new geography. Speed into a market, access technology, innovations, or customers are what motivates strategic buyers.
The upside is they often pay more money. The downside is they’re slow in their decision making. They have committees, executive committees, boards of directors, etc. They are not in the business of buying other companies, so they often operate very slowly to decide to buy.
Financial buyers. The bottom line! Return on Investment, that’s all they care about. They want ROI.
As an example, today they may buy a company at five times EBITDA. What they want to do in the next two to four years is flip it and sell it at eight times (or higher) EBITDA. That’s their objective, so it’s a pure financial transaction. They’re fast, they know what they’re doing. And their goal is to invest in or buy a company at the lowest price possible. They’re very experienced, they are usually experts about this process.
An ESOP. That’s a buyer who is an Insider. You may want to have your employees buy your company. An ESOP is a qualified plan under ERISA, which is under the Department of Labor.
A few benefits of a sale to an ESOP might be to sell the stock of the company and pay no tax on the proceeds, sell the stock but keep the control of the company, or buy out minority and majority of shareholders with pre-tax dollars.
Management Buyout. That’s another type of an Insider. Sometimes business owners sell their companies to management. That type of a sale usually comes with a six or seven-figure promissory note, including interest.
What’s the downside selling to management with a high dollar amount plus interest in a promissory note? Your previously-owned company must earn enough money for debt service. The new owners may not be as good as you are (as a business owner). There are some risks with this type of buyer.
Transfer to family members. Like a sale to management, a transfer to family members most likely will cause the writing of a promissory note. So, what’s the problem of selling a business with a promissory note to your family?
One question is, “How do I fire my family member if they don’t pay the promissory note?” Additionally, you never get rid of the stress, you’re always following the cash flow and profitability of the company you sold. Sometimes Thanksgiving or other family occasions may get a little dicey. You may not be invited to the Thanksgiving dinner! You want to weigh those risks before transferring the company to family members.
It is common for a business owner to become distracted about the potential buyer and what the buyer might do to the business long before there is even a discussion with the prospective buyer. These burdens should be shifted off your shoulders and onto the shoulders of other people. We call these people The Success Team™. Learn more about the Success Team in chapter 3 of The Exit Strategy Handbook, 4th edition. It will be the job of the members of this team to help you find the right buyer for your business.
Upcoming Business Sales Solution Seminars:
Thursday, May 17, 2018, 8:00 am to 10:00 am – MBAF, Fort Lauderdale
Thursday, June 14, 2018, 8:00 am to 10:00 am – BBVA, West Palm Beach
NEXT MONTH’S ARTICLE: PART 3 – PREPARING FOR THE FRUSTRATING SURPRISES
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