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Who Will Buy Your Business?

Who Will Buy Your Business?

As a small business owner, there can be many reasons why you would want to sell your business. Maybe you are ready to retire or are no longer interested in the business itself. If you find yourself in such a position, you may be ready to locate a buyer, sell your business, and never look back.

For others, this may not be the case at all. Perhaps your business is growing quickly—or not at all due to situations outside of your control, like a worldwide pandemic. Some owners need an investor’s help but would still like to have a role in the future of their business.

As you scour Google for financial advice, be certain to consider the types of companies or individuals who may buy your business and which type of buyer is best for your unique situation. Most importantly, think hard about the role that you wish to play in the future of your business. Knowing when to sell is a significant time in the life of a business owner.

Who Can Buy Your Small Business?

To choose the best buyer for your small business, you must first understand the two main types of buyers. These are strategic buyers and financial buyers.

As the name implies, strategic buyers will buy a small business as a strategy that will then benefit them in the grand scheme of things. Financial buyers, on the other hand, will buy a small business with the goal of selling the business for a profit, generally within 3 to 10 years.

Who Are Strategic Buyers?

Strategic buyers aren’t looking to purchase just any small business. Strategic buyers search for businesses that own a product line, technology, or space within their industry.  Once purchased this business can be integrated and used to better their primary company.

Because of this, strategic buyers typically buy 100 percent of an owner’s business and assume all responsibility for it. Usually, strategic buyers have their own management teams. If you are a small business owner who is looking to retire and completely hand over the reins to someone else, you would likely prefer a strategic buyer.

Strategic buyers may include:

Family Members

As a small business owner, you may have thought about selling to a family member. They likely know the business well and are someone you can trust. When selling to a family member, be sure that you can separate your business values from your family values.

Employees

An employee may know your business from top to bottom. For many small business owners, employees are great strategic buyers.

Outside Parties

An outside party may be a competitor, customer, or supplier. It can be unnerving to sell your small business to a competitor, but business competitors will already understand your industry and understand the value that your business offers.

Since strategic buyers understand the potential synergy of an acquisition, they are likely to pay more for a business than a financial buyer would. Synergy is the idea that the combined value of two companies will offer more value than they would individually.

Apple is a great example of a strategic buyer who understood the value of synergy. In 2010, Apple bought Siri, a voice recognition software that acts as a virtual personal assistant. Apple acquired Siri with the idea that they could integrate the technology with their own technology, resulting in a better product. In 2011, they did just that and revealed Siri as an integrative feature of the iPhone.

In addition to the synergy between Apple and Siri, Apple was able to expose Siri to a much larger audience, making it a household name. Like Apple, strategic buyers can provide access to distribution channels and use their management expertise to take a small business to the next level.

Who Are Financial Buyers?

Unlike strategic buyers, a financial buyer’s primary goal is to purchase a small business for as little as possible. They then invest in and improve the business, and sell it for a profit in three to ten years.

Financial buyers are less concerned about their familiarity with specific industries and more concerned with the price that a small business owner is asking for. These buyers always have an eye on the cash flow that their investment will eventually generate.

Financial buyers may include:

  • Venture capital firms
  • Private equity firms
  • Investors

Financial buyers can be compared to long-term investors because they will likely not want full ownership. They prefer working with a well-managed business, only introducing changes that will make your small business more profitable and more valuable to future buyers.

With this as their primary goal, financial buyers are more likely to keep an ongoing relationship with current owners or management. As a small business owner, you should keep in mind that financial buyers are typically not familiar with your industry. So, while they can provide financial advice for small business owners like yourself, they will still need your management expertise to keep the business running smoothly.

If you or your management team want to continue working at your business, partnering with a financial buyer could be an attractive option. You and your team will usually be able to continue managing your business, and the financial buyer will find ways to make the business more profitable.

If you choose to work with a financial buyer, you should also remember that a financial buyer’s ultimate goal is to sell your business for profit down the road. If you do stay on and continue managing your business, it will be like selling your business twice.

Financial Advice for Small Business Owners

Now that you understand the difference between a financial buyer and a strategic buyer, it is important to review what each can offer and how a partnership with either affects you as a small business owner.

The Advantages of a Strategic Buyer

There are several key advantages to finding a strategic buyer.

Higher Sales Price & Quicker Transition

Because of their many potential synergy opportunities, strategic buyers are usually able to offer you more money for your business. Also, they will likely be familiar with your industry, so transitioning will take less time and have fewer hiccups.

Happier Clients

When a strategic buyer takes over your company, they will likely offer your customers access to more products and a wider variety of services. If you will value the happiness of your clients even after you have sold your company, a strategic buyer can be beneficial.

The Disadvantages of a Strategic Buyer

There are also a few disadvantages of a strategic buyer.

Employee Reductions

One reason that strategic buyers can offer so much more for your business is their ability to immediately cut costs. Unfortunately, one major cost that they can cut is your staff. Their business already has necessary employees like a management team and a warehouse crew, so to remove any duplicate positions, they will likely keep their employees and let yours go.

No Equity

Because a strategic buyer will purchase 100% of your small business, you will not have the option to keep even a minor equity stake in your business.

Company Culture and Legacy

When a strategic buyer steps in and takes over your business, they will make several changes. Your company culture and business name will be altered quickly. This could be troubling to a small business owner who worked hard to build their brand and work culture.

The Advantages of a Financial Buyer

When you have a financial buyer, there are several benefits that you can expect.

Job Security

Financial buyers usually do not understand the specifics of your industry, so they will want your employees to continue working and managing your business after you sell.

Continued Involvement

Small business owners will likely stay involved when working with a financial buyer. This may be through providing industry expertise or investing in the company.

The Disadvantages of a Financial Buyer

As with any arrangement, there are several drawbacks to a financial buyer.

Lower Purchase Price

Without their ability to take advantage of synergies, financial buyers are unable to offer small business owners a higher purchase price.

Strictly Business

The main goal of a financial buyer is to make a profit. They aren’t investing in your business because of their passions or to help the family business prosper. Since you will likely remain involved with your financial buyer for quite some time, you must have a good relationship.

In short, when it comes time to choose whether to work with a strategic buyer or a financial buyer, small business owners must consider several factors.

Summarizing the Why

There are instances when a small business owner may prefer a strategic buyer. These may be when:

  • They want to completely sell their business and move on entirely.
  • They would like to get the highest payout for their business upfront.
  • They do not want to continue working and are okay with laying off their employees.
  • They do not mind that the company culture and name will change.

Likewise, there are instances when a small business owner may prefer a financial buyer. This may happen when an owner wants to stay involved, wants to make sure that current employees can keep their jobs, or if they understand that the business may be sold again down the road.