Determining the best buyer makes sense only in context with your goals. Some owners may want to exit completely as soon as possible. Others, who are active in the operations, may prefer to find a buyer with whom he can continue his involvement, having achieved meaningful liquidity from the business through a partial sale. Some owners may be looking for both a substantial liquidity event as well as an ongoing financial or strategic partner for pursuing growth opportunities, such as an acquisition or other strategic initiatives. Other owners are concerned about leaving a legacy for the employees and other stakeholders. Of course, underlying these goals is the achievement of a satisfactory purchase price.
Clarifying your goals in advance helps to determine the best buyer. Your investment banker can help you clarify your objectives, assist in extensively researching and qualifying potential buyers and provide advice about the “best” buyer based on your situation.
A Suitor Is Not Necessarily a Buyer
Regardless of the type or specific characteristics of potential buyers, they must be qualified, demonstrating their ability to pay and a track record of successfully closing transactions. A suitor is not a buyer without those two factors substantiated. Simplistically, there are three types of buyers.
Strategic or Corporate Buyer
A corporate buyer may highly value your business due to some strategic reason, such as market position, technology or customer base, and its ability to exploit various synergies to create shareholder value. Selling to a strategic buyer can offer your company a number of resources to which you may not have previously had access and can help it pursue its growth plans. Further, selling to a strategic buyer provides immediate liquidity to you as well as frees you from the ongoing business risks.
The best strategic buyers are those that are not directly competing with your company currently, but are searching for a way to obtain a strong market position within your niche. They may be domestically focused or international players. They may be in an adjacent niche and are trying to determine whether to spend the time and resources to create your next competitor or whether to buy a platform company, such as your company, within your niche – buy versus build analysis. Companies acquired as industry platforms generally realize premium purchase prices. Additionally, strategic buyers can often justify paying premium prices due to the various synergy opportunities they expect to garner.
Private Equity Group/Financial Investor
A private equity group aggregates capital from institutional investors, such as pensions and endowments, with a mandate to maximize returns by investing in privately negotiated transactions. They are not operators themselves, but their strategy is to make investments in companies in which they can partner with quality management teams and assist in growing the business. Private equity groups generally purchase a majority or control position in the company and the existing owner often maintains meaningful minority ownership. Due to the structure of these private equity partnerships, they often invest with a three to five year horizon until they sell the company. During this period, they are singularly focused on creating maximum value and all the owners, including the owners who reinvested at the time of the initial sale, participate in this return.
A sale to a private equity group offers you immediate liquidity for a portion of your ownership as well as provides the opportunity for a future return based on the company’s performance and the amount of equity you leave in the business at the time of the transaction. With this structure you can remain actively involved in the business, but have a partner to lean on as the company pursues its strategies. Some owners view this type of transaction as a transition stage before completely exiting the business.
Conversely, in the case of a management buyout, if your management team is interested in pursuing the purchase of your company, a private equity group can provide the capital to support this acquisition. In effect, the private equity group partners with your management team and the buyout allows you to exit.
When identifying potential buyers for a business, many owners believe the logical ones are their direct competition. Generally, this is wrong. Competitors believe they can grow and expand market share at a much lower cost than the purchase price of your business. Plus, they understand the operational and industry dynamics inherent in a similar business and they can be quite skeptical of your prospects. Often, when a competitor makes an offer to purchase, it is on the low end of the range of offers received.
You must be very careful when approaching a competitor to buy your company. Doing so puts you at a high risk of divulging confidential information that the competitor could use against you later, especially if the deal falls through. A “tire-kicker” competitor is very dangerous. To the extent you decide to approach a direct competitor during a sale process, it should occur only after you have received genuine interest from other legitimate parties.