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Buyers can be broken down into three categories:

A.   Entrepreneurial Buyers:

Typically an individual or small group of business people who are looking to purchase and run their own business. Their funding comes typically from real estate equity and cash they have accumulated through their efforts (employment or other business ventures). They often don’t have specific experience in the industry or market of the target company, but have the entrepreneurial drive to learn and be successful.

The Entrepreneurial Buyer’s approach to valuation is a balance between:

1. 1. Earning a FMV Salary for the job they do
2. 2. Ensuring that the business can afford to pay the financing put in place for the acquisition
3. 3. A risk appropriate Return on Equity (ROE) that reflects the personal equity they invested

B.   Strategic Buyers:

Typically a business looking to make a strategic acquisition to complement their current operations. The Strategic Buyer’s motivation could one of:

1. 1. Consolidation (eg. Buying a competitor)
2. 2. Integration (eg. Buying up or down their supply chain)
3. 3. Growth (eg. Buying distribution channels, customers or product/service capabilities)

The Strategic Buyer can often realize operational synergies and cost savings by acquiring a target company thereby improving the overall cash flow of the business. This results in an ROE that would be higher than for an Entrepreneurial Buyer. Often, Strategic Buyers are less price sensitive and tend to be willing to pay a higher price for an acquisition.

C.   Investment Buyers:

Investment Buyers tend to be a more sophisticated type of buyer who views a target company strictly based on the strength of the financial numbers. A typical Investment Buyer would be a Private Equity firm who is looking to make a strategic acquisition of a business from an investment and performance perspective. A key consideration for this type of Buyer would be to have a well-seasoned management team in place to continue to run the day to day operations. The Investment Buyer generally  does not take an active role in the running of the business, but rather on a director role, helping to establish strategic direction and providing growth financing as needed.

Investment Buyers tend to only acquire a business with a clear exit strategy in place. It is not uncommon for Investment Buyers to offer the Seller incentives to continue in the company after the transaction with stock options or similar incentives. Investment Buyers are typically highly sophisticated and disciplined, and will pay up to the ROE they expect from the acquisition based on risk, strategic benefits, tax savings, and so on. There is typically very little emotional influence in the decision making process. Investment Buyers usually will not look at businesses under about $2 million in cash flow, as the costs of acquisition is higher for the Investment Buyer.

Do You Have a Sellable Business?

What makes a business sellable? Simply put, a business can be sold if there is a willing buyer for the business. Which begs the question, what are buyers looking for? Often buyers don’t really know what they want until they find it.

When we ask buyers what they are looking for, the most common answer is:

“A strong cash flowing business, in a growing industry, with high barriers of entry and an existing management team in place.”

Show us a business like this and we would have a line-up of buyers. The reality is that there is no such thing as a perfect business. Businesses, by nature, have flaws and issues and buyers need to realize that these flaws and issues are what we call RISK. Every business has RISK associated with it, and if someone ever says that they have a no-risk business opportunity, walk away.

Buyers do not always look only at profits and growth opportunities. Sometimes, buyers may be interested in acquiring a certain asset of the business and are willing to buy the entire business to obtain this asset. Sometimes the asset may not even be a tangible asset. For example, a person may buy a business to get access to the location, a customer list or a website address. Competitors may purchase a business only to close it down in order to capitalize on the decreased supply in the market. In some instances, businesses are bought for their liabilities and the tax benefits associated with these liabilities.

Purchasers ultimately make their decision on whether to purchase a specific business on the Risk-Reward profile of the business. What is not always evident is what reward a given buyer gets from acquiring a specific business.

As you ask if, when and how you will sell your business, don’t assume that just because your business is not making any money that there is not inherent value in the business. To find the value in any business, ask yourself the following questions:

• • What makes my business successful?
  • Why do customers come to my business as opposed to my competitors?
  • What value do I add to my customers?
  • What am I best at?