If you’re selling your business, one of the most important considerations is who to sell the business to. Before you do a deep dive, think about whether to sell to a strategic or financial buyer.
A strategic buyer is what it sounds like: Another company within your industry that wants to expand its reach or branch out into your core competency. This buyer might not be in your exact same line of business, but they are close enough that they believe they can successfully absorb your business into theirs.
You should have a distinct approach to appeal to a strategic buyer (and get the highest possible selling price).
- Focus on the synergies that exist between your business and that of the buyer. Synergy has become a popular buzzword but essentially means the overlap and compatibility between two things. Your marketing materials and overall positioning should be appealing and make it plain that integration is both possible and advantageous. This may also fetch a higher sale price, as shown here:
- Company A is looking to buy company B. They are in the same industry and have some institutional overlap. Company A knows that after the sale and during integration, they can streamline company B and make it more profitable, and thus company B is “worth” a lot to them.
- Naturally, buyers will not come out and give you a higher valuation unprompted, which is why it is so important for a seller to know this and leverage it during negotiations.
- Market what you have that the buyer does not. This is why they are looking to buy in the first place. This is your core competency, the thing you do best or have that makes your company profitable. This can be any number of things including technology, processes, intellectual property, contacts, real estate, contracts, and even human capital. By highlighting your strengths, you demonstrate value and can demand a premium from buyers.
A financial buyer is not in your industry at all and is buying your business as a pure investment to seek a return on that investment. Many financial buyers are private equity or venture capital firms. These are professional investors with substantial financial resources who generally look to purchase “turnkey” businesses with management in place so they can continue to operate with increased capital resources to drive greater profitability. While the windfall of cash from a financial buyer may allow a business to expand its existing core competencies, it is rare for such a buyer to cause a dramatic shift in what a company does.
As any business owner knows, every company has its own unique set of circumstances and different buyers are better fits to different businesses.
When seeking a financial buyer, companies should position themselves to focus on profitability, stability, and growth potential:
- You should ensure that all financial statements are accurately and professionally prepared. While financial buyers may have limited knowledge of your specific industry, they are keen to notice any financial discrepancies, as the name suggests. They are looking for something that is or can be easily be made to be efficient and streamlined to drive down costs and push revenues. Practically, this can mean the elimination of owners’ expenses, unprofitable divisions, and any other unnecessary expenditures.
- There is a general attitude within the M&A industry that financial buyers offer lower valuations and offers than strategic buyers, and this belief is not entirely unfounded. The primary reason is that financial buyers adhere to strict benchmarks for ROI, and thus the less they pay for a business the higher this metric gets. Since they do not gain a measurable advantage from one investment to the other, it is much easier for a financial buyer to “go elsewhere” when compared to a strategic buyer who has a long-term interest in acquiring your core competency.
It is not true that financial buyers are inherently worse or not worth considering. As any business owner knows, every company has its own unique set of circumstances and different buyers are better fits to different businesses.
HOW MANY BUYERS TO CONSIDER
Once you determine which buyer type is most fitting for your business, based on where you stand and what the market dictates, you must determine the number of buyers to consider. There are two general approaches - colloquially referred to as the “sniper” and “shotgun” methods.
- Sniper: You do research and determine a short list of companies that you believe to be very good fits, and deliberately take it to each one, one at a time.
- The advantage is that you do not have to widely divulge sensitive information.
- Even with the proper non-disclosure agreements in place, many business owners are justifiably hesitant to reveal the inner workings of their companies, especially to strategic buyers within their industry.
- Shotgun: you qualify a list of companies that you believe may be interested, and then take it to them all within a short time frame.
- While there is more perceived risk involved in the shotgun approach, you also are more likely to get offers in a shorter time frame.
Like so many parts of this industry, the selected approach varies case by case and the final decision rests with the business owner.