When looking to sell your business it is important to identify who your proper buyer is likely to be. Business brokers and business intermediaries for main street and middle market businesses generally know what type of buyer will pay the most. Many sellers think of competitors when they go to sell.
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Competitors. Some businesses have natural efficiencies that come with size. For instance, route businesses such as package delivery become more and more profitable the shorter the route between stops. This creates a logical Buyer in a competitor because of the potential for synergy and economies of scale. Location dependent businesses buy competitors to obtain more quality locations. These Competitors are also known as Strategic Buyers.
Competitors may be the only Buyers for large complex businesses, especially those with low profits, because they can determine if “their way” of performing will increase the operating results of the existing cash flow. Yet, if there are not natural synergies, competitors do not typically pay the highest price for most well run businesses because they already have a business system and are not willing to pay a premium to learn yours.
Truck Repair Blues
A large specialty truck sale and repair service company has seven locations in four states. The owner had started the business twenty years earlier out of his spare bedroom. He had grown the business to $45,000,000 in sales by under pricing and out hustling competitors every day. The business is extremely complex with multiple product lines including new product sales, product service, and a startup division which is venturing into a completely new market. He has a competent but homegrown management staff who do not have the ability to run the company for a purely financial Buyer. The Seller has forbidden the intermediaries trying to make a market for his business to contact competitors and suppliers for fear that word will get out and it will hurt his business. Even after explaining how the list can be very carefully tailored to prospective Buyers with capital, a strongly expressed interest, and a past history of making discreet purchases, the Seller still will not allow the intermediaries to approach anyone in the business. No sale is possible under these conditions.
Related businesses, not competitors. For example, a graphics company might buy a printing business. Or a concrete pipe company might buy a trucking company. This concept is known as bounce-back synergy. In these cases, one business is very dependent on the other. This is a longer shot than many of the others but they do occur. It also lessens the risk of giving all your detailed information to a competitor who never intends to buy you.
In all cases when thinking about selling your business think about who will pay the most for your business and how do you best interest them in your business.
Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors