Knowing your target buyers when selling your business
Knowing your target buyer is essential to selling your business – it means that you won’t waste your time chasing after a buyer who’s just not on the same page as you, when you should be spending your time trying to get the best business valuation. If you’re trying to sell 100% of your business, for example, it’s no good trying to make a sale to someone who only wants a minority stake. Here are the typical buyers for a small business, and what kinds of sale they’re best suited to.
Typically a private equity house or a wealthy investor, financial buyers tend to be rigorous and professional, carrying out extensive due diligence. They will usually focus on making a good return, and will often look towards an exit within three to five years. They will also typically want a seat on the board. While they will often require long-term management lock-ins and revenue targets as a condition of sale, they can be useful if you want to sell a minority stake for a strong injection of capital, while still keeping control of your business.
Trade buyers are buyers who are another company – and that typically means selling to a competitor who are looking to expand. This offers potential for mergers, synergy, and can also push up the price, since a trade buyer is often concerned that a competitor will acquire your business instead. On the other hand, carrying out the sale can be delicate, since you will have to be careful with how much information you give them – while giving some is required, remember that you can anonymise clients and some other information when you present it to a competitor.
These come in three distinct types, but all involve management buying out the company – this will always involve managers receiving a controlling share in your business. Management Buy Out (MBO) involves managers from within your business buying out the company – this can ensure good continuity. Management Buy In (MBI), conversely, involves external managers buying it out – which can inject fresh expertise into the company, but can also cause hostility among existing management. The hybrid option, the Buy In Management Buy Out (BIMBO), takes the best of both – getting the continuity of an MBO, with the new expertise of an MBI.
So depending on where you want to see your business going after you sell and whether you want sell a controlling stake, a minority stake, or the whole of your business, you’ll have to choose the right target buyer for you. Be sure to make the right choice – it will massively speed up the efficiency of the process to get it right the first time. And remember to check your company’s value with Pomanda’s business valuation calculator before you get started.