Takeaway: Learn which buyer is more inclined to pay a higher purchase price.
As an M&A intermediary, advisor, or business broker, you should be well-versed in the differences between the three major buyer types: Strategic/Industry, Financial & Individual. Understanding the motivations of each type of buyer is extremely important in determining how you assist your client in preparing the business for the ultimate goal; which is to make it marketable to the largest pool of buyers and to sell it for the best price and terms. In each case, buyers have their own unique interests and motivations that directly affect how they approach your client.
Strategic/Industry Buyers. A strategic/industry buyer typically owns a business that operates within the same industry as your client; meaning that both companies may have similar products, similar services, and similar customers. Generally speaking, this type of buyer is searching for opportunities that will allow them access to a new geographic territory or to acquire a product, service or technology that they want but don’t already own.
The strategic/industry buyer may or may not offer the highest price and best terms depending on how motivated he/she is to acquire your client’s assets. Goodwill may have little, if any, value to this type of buyer.
Financial Buyers. Rightly or wrongly, financial buyers are generally thought to make acquisitions based solely on their ability to generate acceptable returns of their investments (ROI). Having this bias in mind could lead you to inform your client that the financial buyer must offer a low price in order to produce the type of ROI demanded by the investors who provide funds for acquisitions. Financial Buyers prefer to offer what they deem to be a fair and reasonable price & terms; not necessarily a low price.
One type of financial buyer is often referred to as a private equity group (PEG). These are firms that acquire businesses in industries that align well with their experiences. Post-acquisition, the PEG could bring in new management or partner with existing management. In many cases, the PEG will also infuse capital into the business in a well-designed plan to grow the company; which is expected to produce an acceptable return on their investment. Unless the PEG is acquiring a small company (aka: add-on or bolt-on target) that matches the criteria of an existing platform company, PEGs often target companies that generate earnings (EBITDA) of $2 or more million per year. Add-on targets with smaller earnings may be considered as a potential acquisition candidate.
A PEG has the ability to offer various acquisition strategies to your client. Examples include mergers, acquisitions, divestitures, exit planning, family succession, growth strategies, access to capital, risk reduction, management buy-outs, management buy-ins, and recapitalizations (sell a portion of the company).
Individual Buyers. For smaller companies, the individual buyer may be the best, if not the most likely person to purchase your client’s company…or at least the assets of that company.
Typically, many individual buyers are what could be called “corporate refugees” – people who are fed up with working for someone else and who want to achieve the American Dream of owning their own business, controlling their own destiny, and keeping the profits for themselves and their families. Most people in this class are first-time buyers, and/or are tired of working for someone else. Maybe they were (1) downsized from their current job, (2) did not want to relocate, (3) were passed up for that big promotion or (4) just got burnt out by the politics at their current company. On the plus side, many individual buyers will bring general management, sales/marketing, and financial experience to the business even though most of these buyers do not know what type of business they want and may not have specific experience in the industry into which they are entering.
Lack of industry experience should not be a deal-breaking obstacle if your client is willing to provide a reasonable training and transition period. These individual buyers are the largest pool of potential buyers and they are looking for three things when evaluating a business:
- the organizational structure of the business,
- its growth potential, and
- the terms of the transaction.
So, Who Will Pay More?
The answer is, “It depends.” Your client’s business’ unique history, experienced staff, market position, and potential future opportunities will lead to different valuations among different buyers.
Michael Lefkowitz, CBI, M&AMI
Founder and Managing Partner
Benjamin Ross Group
Michael Lefkowitz is the founder of the Benjamin Ross Group, a business sales, mergers and acquisitions firm, a nationally recognized expert in buying and selling businesses and author of WHERE’S THE EXIT, an exit planning book for business owners. Michael has more than 20 years of business sale experience.