Different buyers have different objectives and levels of experience. Understanding these differences can help you in getting the kind of deal you want. As you begin discussions with potential buyers, it’s important to keep in mind that buyer’s goals and objectives vary greatly. In general, buyers can be classified into three groups:
- strategic buyers (public and private industry competitors)
- private equity groups
- individual or “angel” investors
Each group presents a unique set of advantages and disadvantages that can impact the sale. Understanding these differences will help in your negotiations and in finding the buyer best-suited to meet your business and personal goals.
Strategic buyers are driven by potential synergies and associated cost savings between the acquirer and the target entity. For example, you may have a product or service that the buyer lacks, but is highly complementary to their product or service offering. Or, you may have an established presence in a certain geographic or customer market that the acquirer has had difficulty penetrating.
This focus on synergistic value may result in higher offers from this buyer group than from others, since the operational efficiencies that are created can provide immediate higher profitability and a more rapid return on investment for the buyer. Public and private strategic buyers differ in that the liquid market for public company shares may create a more aggressive valuation for public firms over those that are private. This may allow the publicly traded company to pay a premium price for your business, especially if you’re willing to accept a stock-for-stock transaction. However this is not always the case as private strategic buyers today have access to capital at historically low cost.
Corporate structure after the sale may also differ with a sale to a strategic buyer. For instance, unless management is viewed as absolutely critical to maintaining company performance, strategic buyers generally don’t require that the active, selling shareholders remain with the company much past a short transition period (generally six months to a year). Also, depending upon the size of the target and the logistics involved, the buyer will oftentimes completely absorb the target company into its current operations—disbanding the old company’s operations—making the ability to relocate the target company an important consideration.
An additional consideration for strategic buyers is the clarity of historical corporate records. Large buyers are particularly sensitive to potential liabilities (licensing issues, outstanding contracts, taxes, etc.) that they may become liable for upon purchase. Therefore, as is the case with virtually all transactions, it’s recommended that any outstanding issues be identified and clarified prior to discussions with a strategic buyer.
The advantages of dealing with a strategic buyer include:
- their expertise in closing transactions often expedites the closing
- they generally have a wider range of deal structure and financing options than other buyer segments
- they usually have sufficient resources (both financial and otherwise) to support company expansion and growth
Possible disadvantages include:
- absorption of the seller’s operations into the buyer’s operations may be required (causing plant shutdowns and relocations)
- contingent payments, that depend upon the tracking of financial performance, may be harder to monitor because of the difficulty of keeping separate records
- some employee positions may be eliminated due to consolidation of operations or elimination of back office functions
- there is often a resultant change in corporate culture
Private Equity Groups
Private Equity Groups represent a formal investment fund (or a number of related funds) created by a group of investors for investment in, and purchase of, closely held businesses. The strategy and focus of these groups varies. Some groups focus on specific industry segments, while others are more concerned with the geographic location of the target. Certain investment groups may achieve the same synergies with an acquisition as corporate buyers, particularly if the group is building a portfolio of businesses for a “platform” company within a specific industry. In any case, the private equity group’s primary focus is to achieve the highest possible financial return for its investors.
Since investment groups generally prefer to let their portfolio companies continue to operate on their own, the preference is for the existing management team to remain intact and continue operating autonomously after the sale. Additionally, these groups usually have a planned exit strategy and expect to hold a portfolio business for a pre-determined period of time, which usually is between five and seven years.
Advantages of working with private equity investment group include:
- with professional buyers the closing of the transaction is often expedited
- they often provide access to resources the seller may not have (managerial talent, board advisory, financing, etc.)
- their equity capital has usually already been raised
- the acquired company generally experiences little culture change
Possible disadvantages include:
- the requirement for management to stay may conflict with the shareholders’ exit plans
- the transaction may not offer synergies with other portfolio businesses
- as cash flow-oriented buyers, these groups usually pay a fair but not premium price for the businesses they acquire
- the company may face being sold again within five to seven years
Individual or “Angel” Investors
Individual investors are high net worth individuals seeking to own and manage their own business. Individual buyers expect to be integrally involved in the leadership and management of the company after their purchase. This buyer segment is usually more focused upon the geographic location of the target than its industry, as the buyer is typically not seeking to relocate.
Most individual investors are seasoned businesspeople, with experience in either corporate positions or other entrepreneurial ventures and ordinarily prefer established businesses with proven performance to newly started companies. Due to capital constraints, individual investors usually purchase businesses at the smaller end of the middle market spectrum by performing leveraged buyouts that often include seller financing.
The advantages of working with an individual investor include:
- they’ll have direct involvement, and therefore a stake in the success of the business
- they generally only require active shareholders to remain for a short transition period
- they’re usually not seeking to relocate the business or drastically change operations and culture
Possible disadvantages include:
- they’re typically inexperienced in purchasing businesses, which may prolong negotiations
- their financing and deal structure options are normally not as broad as with other buyer segments
- they’re not as likely to pay a premium price for the business
- they may not have direct industry expertise
Keep in mind that the payment portion of a buyer’s offer should not be your only focus in a transaction. Your understanding of the buyer’s ultimate plans for the business, their expected level of involvement and network of resources, are all important considerations. Knowledge of a buyer’s expectations for the business can be highly beneficial for both negotiations and the closing of a successful deal. You need to be concerned about both the pricing and the terms of any deal, and choose the alternative that suits you best.