How to select the right buyer for your business
Making the decision to sell your business is a significant undertaking filled with complexities. It is crucial to determine your priorities to select the right buyer. In this post, we will explore key factors to consider and provide examples of the trade-offs involved.
Key Factors to prioritize
Different buyers bring different skills, cultures, and plans for your business’s future. To compare offers it is crucial to understand what your priorities are. Which factors are non-negotiable, and which can be traded off. It is almost certain that different buyers will be stronger in different areas. Some factors to consider are:
Continued Involvement: Do you wish to remain involved as an employee, director, or in operational control?
Future Leadership and Culture: Do you put a high value on preserving the existing culture and brand of your company? Are you keen on ensuring employee continuity?
Sales Price: What is the minimum price you are willing to accept. Is getting the highest price your priority or are there other factors which are important?
Stake for Sale: Do you want to sell a minority, control/majority, or 100% stake in the business?
Time for Exit: Do you have a specific deadline, or are you willing to wait for the right deal to materialize?
Deferred Payments: Are you open to alternative deal structures like seller notes and earnouts?
Type of buyer
When selecting the buyer, it is important to understand their plan, culture and how they are incentivized to ensure that the acquisition will achieve your priorities. There are three types of buyers:
Strategic buyers: these are companies in the same or adjacent industry as your company, who are acquiring the company for assets or customers. A strategic buyer is likely to offer the highest price but will often assimilate the acquired company into their existing operations, changing the brand and culture and potentially laying off employees. A strategic buyer with a great culture and need for your company could be ideal.
Individual entrepreneurs: Often referred to as search funds, these are a class of entrepreneurs who are looking to acquire and operate a company. They vary in access to funding, investor backing and work experience. These buyers have long held periods, and often see owning and building a company as life’s mission, so they are motivated to maintain your company as a stand-alone entity, preserving the entrepreneurial and family culture. However, vetting their capabilities is crucial.
Private equity: These are firms which have raised funds and built expertise to invest and improve companies and often exit in 5-8 years. PE firms vary in their approach but are incentivized to focus on investor returns and have shorter times than strategics or individuals. PE firms are more likely to focus on short-term initiatives and/or cost cutting and have more aggressive management styles. The right PE firm will have strong industry and transaction expertise, driving a simpler close.
Other considerations
Full Financial Exit: Opting for an immediate financial exit with no earnouts or seller notes provides liquidity and reduces future risks. However, it might result in a lower overall transaction value since investors place a high value on deferred payments. The implicit value of earnouts could be equivalent to 20-30% per year.
Rolling Over Equity: If your business is rapidly growing, rolling over part of your equity can demonstrate confidence in the business and yield substantial returns. However, it requires confidence in the investor's abilities.
Staying vs. Leaving the Business: Consider whether you want to stay involved post-sale, potentially as a part-time advisor or in a specific role. Understand that if you choose to remain, you will become an employee of the acquiring company, so building a relationship with the acquirer is essential.
In conclusion, selling your business involves a myriad of decisions and trade-offs. Prioritizing your goals and understanding the implications of each choice will help you navigate this complex process effectively. If you are looking for a sounding board, please feel free to reach out to me at mo@mkfcontinuity.com.