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 value in the business than a financial buyer depending on the synergies they expect to gain.
It is crucial that buyers are screened before committing to what can sometimes be a lengthy due diligence process. If a buyer is not qualified financially or otherwise, a lot of time and money can be wasted going down this path with a potentially failed outcome. Sellers will save a lot of time and cost by enlisting the help of a seasoned business broker or M&A advisor who are experts in the process. The buyer should provide information on available funds for investment, the sources of financing, as well as if there are any outstanding judgements or bankruptcies against them or their company. In addition, the seller should find out the reason the prospect is interested in buying a business. If the buyer is a company the seller should understand what synergies they may be seeking. If the buyer is more on the financial side, the seller should understand the track record of the investors if one exists.
It is also important to determine how serious the buyer may be. Many prospects could be people wanting the entrepreneurial lifestyle but not ready or willing to take that leap. Or even competitors posing as a potential buyer looking for some industry insight. For this reason, it is vital to ask the right questions when screening prospects. According to entrepreneur.com some essential questions to ask are:
What kind of business are they seeking and how large? In many cases a buyer who is unclear on this answer has not completed enough research or preparation to understand what they are looking for in terms of number of staff, sale price, or even the industry they are looking to get into. Let alone to determine if they are financially qualified. These are critical components and usually mean they are not serious if they haven’t become clear on this basic information.
What is their time frame? Serious buyers will usually have some kind of time frame they are looking to close on a business. If they are hazy on this subject it could mean they are just entertaining the idea and could lead to a prolonged waiting time and ultimately may not pan out as a sale.
How Long Have they been looking? If the buyer is relatively new in their search that is also an indicator that they may not have put a lot of thought into it. They also may not be preapproved for financing and are just starting out on their journey. On the flip side, if they have been looking a long time, they may be the type that have always wanted to have their own business but when it comes down to it they are not willing or able to take that final step.
What is their experience or qualification in this specific area? Depending on the business the owner may need to be qualified in the specific service being offered, like a general contractor license for example. And if they are not do they have intentions of hiring someone who is? And then would that make financial sense given that would be an extra cost. This is a great question to ask just to help them understand what level of experience they may need. They may not realize they are not qualified and this could save time in the long run by weeding them out.
Can they afford it? This is a tough but obvious one. Many potential buyers may assume they will be able to get a loan, or not understand the value of a business. It is important to get this out of the way early to ensure alignment. Serious buyers should also be able to show proof of funds.
Selecting the best buyer is a crucial step that can save much headache down the road when executed correctly. Having a prequalification process in place before sharing confidential information with buyers will help to eliminate those who are less serious, or deflect competitors just trolling for information and will ultimately lead to a much more positive outcome for all.