5 Considerations When Selling a Business to an Individual
If you’re selling a small business, there’s a chance that you’ll attract several individual buyers once your business is listed.
Whereas financial and strategic buyers are companies that acquire other companies, an individual buyer is just that: an individual looking to purchase your business.
Individual buyers can be a great fit for some businesses, while some businesses are better off in the hands of a strategic or financial buyer.
At MidStreet, we've worked with hundreds of business owners who have sold to individual buyers, so we know what to expect when one is interested in your business.
In this blog, we’ll break down five things to consider (in no particular order) when you’re approached by an individual buyer, and help you understand whether or not they are the best buyer for your business.
Let’s get started!
1. Do your goals align?
When considering selling to an individual buyer, you want to make sure that any emotional ties or future visions for your business align with those of the new owner.
As a business owner, you may have an established role or reputation within your community that was built alongside your business throughout the years.
For that reason, you need to think about what the goals of an individual buyer are and if they will have any impact on the way that you and the company are perceived. This isn’t an issue that affects every business seller, but it’s one we’ve come across enough to recognize its importance in your considerations of an individual buyer.
For example, if it’s important to you that your business continues to operate out of the same location, but the new owner intends on moving it to a different area, that’s something you’ll want to consider before selling to them.
These things matter more to some sellers than others, but if you’re at all concerned about the way your business is operated after selling, then the new owner’s goals and plans are things to consider.
2. Is a Strategic or Financial Buyer a Better Fit?
Since individual buyers are most likely using their own savings and an SBA 7(a) loan to buy your business, the amount that they can spend is usually more limited than that of a strategic or financial buyer.
Depending on the size of your business, you may want to consider if you could maximize its value in the years prior to selling and attract a different kind of buyer.
Businesses with up to $1 million in earnings are usually sought out by individual buyers, but if you’re realistically close to surpassing that amount in the next few years, private equity groups and strategic buyers could start to become interested.
Financial and strategic buyers are often willing to outbid individuals because the business they’re acquiring can help them increase profits through synergies.
For example, let’s say you own a manufacturing company that produces automotive parts. A large automotive company has to buy the exact parts you manufacture in order to produce automobiles.
That automotive company could substantially reduce their costs by purchasing your parts manufacturer as an “add-on” to their company, eliminating the need to outsource for those parts.
Since this investment will have such a high rate of return for the automotive company, private equity or strategic buyers will be willing to pay a higher purchase price for your manufacturing company than an individual who doesn’t have the same level of buying or production power.
Whether or not financial or strategic buyers are interested in your business depends entirely on its size, earnings, and industry, but if you’re reasonably close to surpassing $1 million in earnings, then it’s possible that an individual buyer isn’t the best fit.
3. What’s Their Experience?
Something else to consider with individual buyers is their experience in one of two areas: business ownership, or a role within your industry.
Many individual buyers only purchase one business in their lifetimes, so it’s likely that yours is their first endeavor into business ownership. This doesn’t necessarily raise concern, but it is preferable that your buyer has held a management position within your industry if they don’t have any experience with business ownership.
If a buyer has no industry experience, nor experience owning a business, that doesn’t mean guaranteed failure. In fact, we’ve seen buyers like this succeed on several occasions.
It does mean, however, that you’ll have a more extensive training period, and that the risk of the business failing is slightly higher. You’ll also want to consider what impact this has on your willingness to offer seller financing.
4. Do You Want to Stay Involved?
Sometimes business owners are interested in staying on for a while after selling, whether it’s because they want to take a back seat in operations and let someone with new energy and finances run the show, or they aren't ready for a full retirement, but want to take some chips off the table.
If you think you’d like to stay on for more than a year, then an individual buyer may not be the best fit for you. The SBA (7a) loan program stipulates that the seller can’t remain in any key role after twelve months, and since individual buyers rely on this program to purchase businesses, staying on may not be an option.
Your business could be limited to individual buyers depending on its earnings, but if you have the option to sell to a strategic or financial buyer and you would like to stay in a key role for more than 12 months, then it’s probably best to avoid selling to an individual.
5. Do You Want an Easier Selling Process?
One of the benefits of selling to an individual is that the sale is usually quicker and easier than that of a more sophisticated buyer. This is true for a few reasons, one being the less intense due diligence period.
Individual buyers won’t conduct as thorough of a due diligence process because the amount they’re willing to spend on due diligence is likely much less than that of a financial or strategic buyer.
These buyers have the resources to dig in and go through financials with a fine-tooth comb, which can prolong the sale. Since the due diligence process with individual buyers is less thorough, it can speed up the time it takes to get the deal done.
Another reason that individual buyers are easier to sell to is their emotional investment. Like you, an individual buyer is going to be emotionally connected to your business. These emotions can start to surface early in a deal if the buyer likes what they see, which makes it more likely that the deal will get done.
We’ve even seen these kinds of emotional attachments to a business turn into friendships between individual buyers and sellers. If you develop a friendly relationship with your buyer, you’ll have less anxiety about selling to them, which can make the transaction much easier on both parties.
The Best Buyer for Your Business
Now that you know a bit more about individual buyers, it should be easier to decide if an individual is the right type of buyer for your business.
The relationships, emotions, and sense of trust that can be developed between you and an individual buyer are huge pros that can ease tensions and anxiety when selling your business, which could be a top priority for you.
On the other hand, if your business is doing well enough to attract the attention of financial and strategic buyers, and a maxed-out purchase price is your top priority, then you may want to focus your attention on those types of buyers instead.
Whether you want to sell to an individual, financial, or strategic buyer, we’ve got you covered. At MidStreet, we’ve sold businesses to all types of buyers and know the ins and outs of working with each type.
If you’d like to learn more about what kind of buyer is best for your business, contact us today. We’d be glad to share what we’ve learned from our experience.