What every business broker and business appraiser knows is that in order to get the highest price when you want to sell your business you must identify and attract the best, most motivated and qualified buyer for your business. This will vary with your size, profitability, industry and so on. This post is one of two identifying buyer groups. One of the things a knowledgeable broker and exit planner does is help you identify your business buyer and what they specifically want accurately. This article contains important general information and buyer groups for lower middle market businesses generally with a value of $3 million or above.
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Lets start with a story:
When I was young, I would go fishing with my Dad. We had fun but Dad knew nothing about fishing. When I got a little older I went fishing with my brother’s boxing coach, Bud. Bud was a short, stocky man with a brain tumor – the result of more than four hundred amateur and semi-pro fights. That probably explained most of the crazy things in his life. But Bud knew how to fish.
He told us that he would fly shotgun in small airplanes looking for unfished ponds on farms. (This was long before Google Earth). Then he would go ask the owner if he could fish their pond. Inevitably they would tell him that there were no fish in that pond but go ahead. Bud had his special lures and eighty percent of the time he caught tons of fish. The first time I went fishing with Bud, we caught so many fish so fast it felt like I was cheating! Bud caught fish by fishing in ponds that had tons of fish because no one had fished them in years. Bud knew how to find fish and, with his special lures, he caught them.
What does this have to do with selling a business? The most important thing you have to do is to figure out who and where your fish (Buyers) are. These are the people who are likely to be the most interested in your business and therefore the people who will pay you the most. Who these people are will vary with what you have to sell and what you want to accomplish. Below, we summarize the major groups and when they are likely to be the best Buyers. We address how to find them later in the book.
Remember to make your business as desirable as possible for your ‘best’ buyer. This may involve physical changes to the business over time. It may involve providing financing or training that is a little out of the norm. It certainly will involve looking at the prospective buyers of your business as you would your regular customers and make your product (the total business) as great as possible.
Below, we are outlining how we classify buyer groups. As with any grouping of people some people will fit several groups and some will not fit any.
Synergistic Buyers. These are companies that are in the same or a related business that will have sales or operational advantages allowing them to pay more for the business than what is justified by the current selling business cash flow alone. The classic example of this is a delivery business that buys a competitor with the same territory. Now instead of making an average delivery for 10 miles of driving they might make one every 5 miles greatly reducing the average cost per delivery. The key with synergistic buyers is they CAN pay more if they wish. They tend to be very picky about what and when they buy. You must understand what they are looking for and when they are buying be willing to sell then.
Private Equity Groups (PEGS). These are investment groups that are looking for growth oriented opportunities. Generally they want $3 million of EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortization – a measurement of cash flow potential). They want a good management structure in place and they want to be about to multiply the company size and resell the company in 5 to 10 years. Usually the first company they buy in an industry is called a “platform” and is a larger business. Often after they acquire a platform they will then buy smaller businesses as ” add-ons” as part of their growth strategy.
Competitors. Sometimes competitors are owned by PEGS and/or are Synergistic but here I am referring to them in a more generic sense. Competitors are buyers but unless they are actively acquiring competitors they tend to pay poorly and often (but not always) are a last resort buyer. Of course, if you are in financial trouble they may be the only potential buyer.
Form an ESOP. An ESOP is an Employee Stock Option Plan. It is beyond the scope of this article to describe but in the right circumstances is an excellent way to sell your business. The sale is to a trust that will own your stock for the benefit of your employees. It is a retirement plan under the internal revenue code so it is quite complex. Generally if you have 25 or more employees, stable earnings above $2,000,000, then and ESOP should be reviewed as an option.
Whichever buyer type makes the most sense for you and your firm make sure you understand what they will buy, when they might buy it, and most importantly what they will never buy. As always you may call us to confidentially review your situation.
Gregory R. Caruso, JD, CPA, CVA
Harvest Business Advisors