If you’re planning to sell your small business, it’s imperative to think about who you’re going to sell it to. After all, there are lots of different people who might be interested in investing in your company, so considering your options is important.
In this article, we introduce five types of buyers for your small business and explain what they’re looking for in a company.
1. Individual Buyers
When a solo entrepreneur aspires of buying a company, they are referred to as an individual buyer. In many instances, it will be the entrepreneur’s first entrance into the market, and they will be looking for small businesses to take over instead of launching a new brand entirely from scratch.
While some first-time individual buyers will be naive and seeking to follow their dreams, others will be experienced, business-savvy individuals looking to secure the ownership of a company for the first time. Most individual buyers will be backed by years of experience in the corporate world and will be looking to make a company work for them instead of the other way around.
If an individual buyer is actively looking for a small company to buy, they will be seeking an easy transition into the role of the owner-operator. This means they’re looking for a business that is process-driven and well structured, instead of a one-person show that is difficult for someone else to pick up.
Another thing that is unique about individual buyers is that they are probably looking for a long-term investment. They’re not necessarily planning to flip the business soon after buying it. Rather, they will be inspired by the opportunity of taking over and growing the business in alignment with their own vision.
Crucially, when you’re selling to an individual buyer, you need to sell them the story of your company. They want to be involved in the journey and are much more likely to invest in something that is aligned with their values and likely to evolve in the future.
Summary: Solo entrepreneurs looking to invest in a company for the first time. They will be keen to run a company as an owner-operator and are much more likely to invest in a vision they can buy into.
2. Strategic Buyers
Strategic buyers are usually companies (or at least groups of people) that are seeking to add to their current business operations by acquiring a new company. Unlike individuals, strategic buyers are likely to be experienced investors with specific goals and parameters by which they will select a company to invest in.
To attract strategic buyers, your company’s framework needs to assimilate effortlessly into its current structure without the need for radical changes. The whole point of a strategic takeover of a small business is that the new company can feed the buyers’ bottom line without adding a significant amount to their current workload.
While you can sell a dream to solo entrepreneurs, it’s much more difficult to pitch a vision to strategic buyers. Their interest in your small business will be predominantly concerned with its financial performance, as well as the structure that governs your day-to-day operations. If they’re not impressed with either, they won’t make you an offer, no matter how hard you try and sell your vision. Something else that strategic buyers are looking for is versatility. While they’re not likely to institute wholesale changes in a business that they acquire, they want to be sure that the company is versatile enough to integrate into their current ecosystem. Highlighting the ways in which your business is customizable will be attractive to potential strategic buyers.
Summary: Strategic buyers are looking to acquire businesses to add to their current portfolio. They are seeking companies that are financially sound, well structured, and adaptable and will have no problem with paying a premium price for the right business.
3. Financial Buyers
You might reasonably think that everyone is a financial buyer. After all, you’re not giving your business away for free! What we mean by a financial buyer is that they’re predominantly concerned with the returns that you have been generating to date.
Like strategic buyers, financial buyers usually exist as a company and may include:
Each of the above groups is likely to see your business as an investment that will grow their financial assets. This will lead them to prioritize ROI above any other metric. Typically, financial buyers aren’t interested in companies that require hands-on management.
The idea is that the company can essentially run itself while contributing to the growing bottom line of the investors. To find the right companies to invest in, financial buyers are usually incredibly diligent with their research. They will be interested in your key financial metrics and will want to see evidence of year-on-year growth. Essentially, if you’re sitting on a gold mine but want out, financial buyers are going to be extremely interested in taking your company off your hands.
Summary: Financial buyers are usually a group of wealthy individuals looking to acquire businesses that are likely to contribute handsomely to their bottom line. As such, they’re looking for financially-sound businesses that don’t require a great deal of hands-on management to add to their investment portfolios.
4. Family Offices
Family offices are similar in structure to private equity firms. They are registered entities that are essentially holding companies for family members. They’re typically used by wealthy families who are looking to diversify their investments and maintain multiple income strategies.
Headed by the families themselves, family offices are usually looking for highly profitable ventures that are capable of long-term returns. This is because family offices are usually concerned with securing investments with future generations in mind, and they’re not overly interested in short-term gains.
They want to leave their kids and grandkids with a sizeable inheritance, so they will identify companies in certain industries that enable them to do this. So, if you’re trying to sell to a family office buyer, it’s in your interest to illustrate your long-term strategy and how you think your business will stand the test of time.
Summary: Family offices are looking for profitable long-term investments that provide them with a business to pass on to their children. While not common, you will need to show your long-term strategy if you want to attract family office buyers.
The fifth and final type of buyer you might encounter as you look to sell your business is an employee of your company. After all, the people who are currently working in your business are perfectly positioned to understand how it works and what its prospects are for the future. Your current employees likely come from various walks of life and financial backgrounds, and there’s no reason why you shouldn’t consider them as potential buyers of your company.
There are several ways to deal with your employees as potential buyers of your business. Some owners offer stock options, while others launch profit-sharing plans. However, if you want out, you could sell the company outright and hand it over to someone you have confidence in.
However, if you’re comfortable with a long-term exit, setting up an Employee Stock Ownership Plan is a smart move. It’s like an employee trust fund, and it gradually grants your workers control of the company. While you won’t get a lump payment, you will provide your employees with the chance to buy into your company over time. Ultimately, it’s a good way of exiting your business in preparation for retirement.
Summary: Employee buyers are workers within your company who you sell your company to. There are several ways to do this, but an employee stock ownership plan is a good long-term strategy.
There are various different types of buyers you can sell your small business to. It’s important to be aware of these groups, as you will need to consider your sales strategy as you put your company on the market. As each group requires a different approach, you can work out the best possible strategy for each type of buyer and hopefully sell your company sooner rather than later.