When you get ready to sell your business, you need to be prepared to the deal with different types of buyers. You will be greatly disadvantaged in the selling process if you don’t know the type of buyer with whom you are dealing, and their objective as they evaluate your business. It goes without saying, a smart buyer is not likely to telegraph their intention……you have to figure it out.
There are three types of business buyers: individual, financial, and strategic. Each type of buyer has a different objective, and will look at your business in an entirely different manner.
#1 The individual buyer is usually coming from a “normal job,” so their first objective is to replace their compensation. Second, more times than not, they will expect some portion of the purchase priced to be seller financed. Finally, the individual buyer will be highly focused on how much bank financing they can bring to the deal. The deal that’s not “bankable” is not likely to get done with an individual buyer.
#2 The strategic buyer will have a totally different perspective when they evaluate your business. They already own a business, and often times that business will look a lot like yours! Their objective is to buy your business with the expectation there’s some portion of your business they can integrate into their business. It might be they want your business to eliminate you as competition, or they want one of your key employees or a large customer. The strategic buyer will usually want to integrate your business into their business, and operate your business more profitably than you can. I’ve seen strategic deals done at the smallest level (one auto body repair shop buying an auto body repair shop across the street), and at the highest level (Sprint buying T Mobile). Here’s the best part about a buyer having a strategic interest in your business. They tend to pay more simply because they have a different set of objectives.
#2 The financial buyer will be thinking about the return on investment that can be obtained from your business. They usually will have a disciplined risk-reward perspective, meaning the higher they perceive the risk of your business the less they will pay for it. No surprise there. While there are no hard-and-fast rules about this, there are some parameters that will be helpful for you to understand……if your business has revenue of $2 million or less, the financial buyer will generally be looking to pay 2 to 3 times your annual cash flow (how cash flow is calculated is a different topic for another day). This would imply the buyer is looking for a 33-50% return on investment.
If you are considering selling your business, you should seek the advice of a broker or adviser who has experience with all types of business buyers. Being able to identify who might be in interested in buying your business, and why, could have a huge affect on how much money you have when you walk away from the closing table.
Tennessee Valley Group
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