Selling a Privately Owned Business – Briefing 11 – Finding a Buyer
Any business can be sold in some way or other in the market, even if it is underperforming or deemed unattractive.
The key objective is always to maximise the value on sale and achieve the best price and finding the right buyer – not just any buyer – is critical to achieving this.
Set out below therefore are ten helpful tips to finding the right buyer for your business.
1. Your personal objectives will help determine who might be the best buyer. Those objectives will usually be a balance between financial issues, such as achieving a particular price and human factors, for example securing the future of the business.
2. The ideal buyer will normally be a combination of one who will pay a good price, who will add value to the business and to the management and employees.
3. The shape and structure of a deal will also influence your choice of buyer. You will want a fair balance between cash on completion of the sale, any deferred consideration and potential additional performance-based payments.
4. In the small business market there are basically four types of buyer: internal buyers; individual / entrepreneurs; trade buyers; and financial buyers.
5. Internal buyers usually comprise some form of management buyout (MBO), with or without additional external management (MBI) or a combination of the two (BIMBO). This can be attractive to you as vendor, in particular dealing with known parties and the relative simplicity of the process. Those advantages can often however be outweighed by difficulties in funding.
6. Individual buyers will mainly be entrepreneurs, or possibly investors, seeking a suitable business opportunity to satisfy their own objectives. These buyers will often conclude a deal because of a sheer empathy with the business, and a chemistry with you, which can often transcend practical issues. However, individual buyers bring no business synergies to a deal and thus the value to them, and their ability to fund the purchase, can be lower than other types of buyer.
7. Trade buyers are the most common and often the most favoured buyers, because trade acquisitions are normally a strategic purchase. Serious trade buyers will see additional future value from the business fit and future synergies, which will enable them to justify a higher price based upon genuine merger value.
8. Financial buyers are generally some form of venture capital or private equity house; often seeking to build a portfolio of related businesses. Once again there is often good future value through the melding together of these businesses, although this can be offset by most financial buyers desire to capture any business at the lowest possible entry price, as this will determine the eventual capital return on their investment.
9. Small business owners often consider known parties, such as competitors, suppliers or past unsolicited approaches as a route to a quick and easy sale. However, whilst these may sometimes prove worthwhile, generally they should be regarded as “buyers of the last resort”. The main danger is in maintaining confidentiality and the potential damage to the business in providing commercially sensitive information directly to the outside world. Furthermore, experience shows that for every known buyer there are numerous others just as good if not better. Finally, known buyers rarely pay the best price, since the value to them is dictated by their own circumstances and not by market value.
10. The secret to a successful sale is always to undertake the most comprehensive marketing of the business, in a controlled and confidential way, creating competing interest to achieve maximum value.
Finding the “right” buyer to achieve the best possible price is so important, that in almost every case it is essential for a small business owner to find some form of external specialist help.
14 September 2018