The Importance of Selecting the Right Buyer When Selling a Business
When a seller decides to list a business, they are hoping to attract a lot of interest. If this occurs, the question will then be how to determine the best buyer from the pack. After going through the valuation process with a reputable source, the owner should have a clear idea of the company’s worth. Buyers may be willing to pay more or less than the valuation depending on what they are seeking. Finding the perfect match could lead to a larger sale price, more agreeable terms, and usually a quicker closing. For this reason, finding the right buyer is critical and should be a defined process from the outset.
Strategic Vs. Financial Buyers
Buyers come from a variety of places and generally consist of two types; financial and strategic. A financial buyer is usually more of an investor than an operator and tends to be focused on using investor capital and debt to fund the purchase. Similar to flipping a home, the goal of the financial buyer would be to get in as low as possible and then sell it after 5 to 10 years hoping to increase the value along the way. It is common that financial buyers will structure part of the consideration as a seller note. This will help to ensure the previous owner will keep an interest in the company’s success and potentially add to future growth.
A strategic buyer is a bit different in that they usually are larger competitors in the same or similar industry looking to improve on their existing business. Strategic buyers are looking specifically for synergies where they believe they can either increase profitability with added volume or add to their offering with a similar or related product or service. Whatever the tactic, the strategic buyer may determine a much higher (more…)
Read MoreCommon Deal Structures When Selling a Business
The value of a business can be determined in a variety of ways and requires a thorough understanding not only of the actual business but also of the industry, competitors, as well as the current market. Like in residential real estate, in a buyers’ market there will be less competition for the buyer of a business which can drive down the multiple and overall sales price. On the other hand, in a sellers’ market owners may be able to increase the selling price. In addition, there are many other factors specific to each business that can impact price and demand. Regardless of the market, along with ensuring the business will go into the most capable hands, business owners will also want to attract a buyer who is willing to pay a fair asking price for their company. Unlike a real estate transaction, there are many creative ways to structure the sale of a business that can be achieved through a variety of solutions. A few of the more common structures include All Cash Deals, Seller Financing or Earn-outs.
All Cash Deals
An All Cash Deal is the most straight forward and the least risky to the seller. An all cash deal is where the total purchase price is paid to the seller upon the closing of the deal and nothing else is owed by the buyer. These types of deals can often occur when a larger company acquires a competitor and has the resources to pay the entire purchase price. All cash deals are more likely if the business in bankable. However, there are also cases where a seller may accept a lesser amount for an all cash deal since it is often the least complicated structure and allows the seller to walk away at the end without much further obligation. Because of reduced risk an all cash deal can be attractive to a seller and the simplicity of the deal may off set a reduced price given the alternative of a more drawn out structure that may include additional financing or delayed payment.
Read MoreKey Synergies Strategic Buyers Seek Through Acquisition
When purchasing a business, buyers tend to fall into two categories, Strategic Buyers and Financial Buyers. Financial Buyers are made up mainly of investors, like private equity or venture capital firms. While Strategic Buyers tend to focus more on the synergies the potential acquisition can create. These synergies can fall into various areas and lead to increased revenues or costs savings that would otherwise not be realized as a single company.
According to the Corporate Finance Institute, below are just a few synergies that companies may benefit from:
COST SAVING SYNERGIES
Information Technology: The cost of purchasing existing software can be very expensive and doesn’t always provide the perfect solution for the business. However, developing a proprietary solution custom to the company’s needs can be even more costly and time consuming. For these reasons, technology is one of the key strategic synergy’s buyers look to acquire through another firm. Regardless of size or client base, if the target company has a great production system solution that would work well for their needs it can be very valuable to a strategic buyer. (more…)
Read MoreWhen is it Time to Sell Your Business?
As a business owner, there will often come a time when the decision is made to sell the business you have worked so hard to create. For owners that have had a predetermined exit strategy in place and have met the target goals they set for themselves, this can be the final step in what has been a successful venture. Other times the sale may be out of a desire to pursue more exciting or rewarding interests when the current business is no longer providing this result. While other reasons could be more negative and out of necessity to try to salvage what they can from a business that may be in trouble or in an industry that has evolved to a point where the product or service they provide is no longer relevant. This can be a very difficult decision for most however, regardless of the cause there comes a time when it is common for many owners to decide it is time to sell. Below are some common reasons behind the owner’s decision to sell their business.
1. Burned Out.
Just like any other career choice, business owners may reach a point where they have simply become burned out in running their business. Many owners are entrepreneurs that are driven by the initial steps of starting the business which can include searching for the perfect location, analyzing target demographics, and finding (more…)
Read MoreMaximizing the Value When Selling a Business
Many factors go into the valuation of a business. From industry type, to revenue and EBITDA totals, to longevity of the company. As a result, it can be an arduous process to get to the final number where both buyer and seller will be satisfied. Below are a few steps to consider that would help the cause:
1. Reduce Risk Through Semi Absentee Operation
Many businesses rely heavily on the owner’s skill set for their success and require full time hours from the owner to operate. Buyers may consider this situation more of buying a job than a business. Companies that do not need an owner to run the day to day operations will demand a higher price since they already have management in place.
2. Aligning the Financials
Consider having the financials completed by a professional CPA. This will clean up the statements and provide (more…)
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