Deciding to sell your business can be one of the most difficult choices of your life. After all, it's likely your largest asset.
But who’s the right buyer for your company?
Selling to the wrong buyer could be costly. You could take significant financial risk, ruin the legacy of your business, and cost employees their jobs.
That’s why it’s so important to know who the right fit for your business will be and take all the steps necessary to prepare for that buyer.
At MidStreet, we help owners sell their companies every year and one of the first things we do is have the owner ask themselves a tough question, “What type of buyer should I sell to?
To make this decision easier, we’ve written this article and created a cheat sheet to help you understand how each type of buyer fits or does not fit into the future of your business. You may find that there are multiple buyer types that would be a good fit for your company.
Let’s jump in.
An Individual Buyer
The first buyer type you may come across is the individual buyer. They may be a compatible buyer for your business if:
- You are involved in the daily operations of the company and you need a buyer to be prepared to step into that role
- Your business is valued under $5 million or has less than $1.5 million in earnings
- You would be open to seller financing a portion of the purchase price
- You are prepared to help the buyer get financing through the SBA 7(A) loan process
- You are comfortable with the length of the SBA 7(A) loan process
- You are ready to fully walk away from the business following a transition period after the sale - the SBA 7 (a) rules will not let you retain equity or a role in the company
- You know the individual and are comfortable with seller financing to them
- You feel more comfortable selling to an individual than a financial group
- You want as many employees to stay in the business as possible
- You want to ensure the legacy of the business
- You want to sell your business via an asset sale
If you don’t think an individual buyer is the best buyer for your business, then you may want to consider if selling to a strategic buyer, financial buyer, or your employees would make more sense.
A Strategic Buyer
Strategic buyers are generally another business in your industry that could benefit from synergies your business would offer them. A strategic buyer may be a good buyer for your business if:
- You want to maximize the purchase price you will receive
- You are interested in doing a majority recap or a full buyout
- Your business has quality employees, processes, a niche product, an established reputation, and/or a solid customer base
- You are comfortable with the idea of selling to someone in your industry
- You are open to working within the business if the strategic needed you to
- You are open to the buyer changing or merging processes of the business
- You are comfortable with the possibility that the buyer may relocate the company
- You are willing to sell to a strategic knowing that some of your employees may be laid off
- Your industry has big competitors that are consolidating
- You have noticed potential strategic acquirers within your industry
- You have a c-corp and want to sell it as a stock sale to avoid double taxation
- You are okay with the strategic changing the name of the business
- You are interested in growing your minority ownership in your company (if you retain part ownership in a majority recap; also known as a “second bite of the apple”)
- You have a strong management group in place
If an individual buyer and a strategic buyer are not a fit for your business, a financial buyer is likely a better option.
A Financial Buyer
1. Private Equity Group
A private equity group is a sophisticated buyer that will buy your business as a platform or a roll-up company for their portfolio. They could be a good match for your company if:
- Your business has an EBITDA of $500,000 - $1,000,000 or more
- You are interested in either a full buyout or a majority recap
- You want a professional buyer that can elevate your business to a new level
- You would be comfortable being an employee of the PEG
- Your business has clean books and records that would help you survive a rigorous due diligence process.
- Your business is a c-corp and you want the option to do a stock sale
- You are interested in selling your business in a majority recapitalization
- You are comfortable with the possibility of the PEG selling your business in 3-7 years
- You have a strong management team in place
2. Family Office
Another form of financial buyer is a family office. They typically invest money on behalf of one or multiple wealthy families. You may consider them as a buyer for your company if:
- You are open to continuing to operate the business under the leadership of the family office
- You want to minimize your financial risk (by selling), but you are not quite ready to stop working altogether
- Your business has a very low amount of risk and a solid history in your industry and area
- Your company has a strong management group in place
- Your business has an EBITDA of $500,000 - $1 million or more
- Your books and records are clean and organized
3. Search Funds
Search funds typically receive verbal agreements from their investors that they will provide equity if the investment is suitable. A search fund may be the right buyer for you if:
- You are looking for an individual to retain the legacy of the business
- You’re looking for a buyer to take over your owner-operator role of the business
- You feel more comfortable with the fact that they have access to more capital
- You are comfortable with a thorough due diligence process since they will likely hire an outside company to perform a quality of earnings
4. Independent Sponsors
Independent sponsors, also known as fundless sponsors, are individuals with a group of investors willing to financially back them if they find a good deal.
Independent sponsors are similar to a search fund, but slightly different since they often invest in multiple companies and don't usually get personally involved in taking over the business as the owner-operator.
Your business may be a fit for an independent sponsor if:
- You are comfortable with the fact that they don’t have funds lined up
- You already know the buyer and their track record
- You do not have a lot of buyers available to you and they are interested in your company
If you have read about these buyer types and aren’t interested in any of them, you may be better off selling to an employee or your children
The last buyer group you may want to consider is your own employees. This is usually done as an ESOP (employee stock ownership program) through an ESOP administrator. Selling to your employees is the best option if:
- You have sophisticated employees who you know can take over the business
- You know who is going to become the leader of your organization
- You are comfortable not receiving the selling price all at once
- You want to reward your employees for their hard work
- You are comfortable relying on your employees to pay you back
- You are willing to help train your employees to run the business
- You are comfortable disclosing the fact that you would like to exit your business to your employees
Another option is to sell your business to your children that work in the business. You may want to sell to them for the same reasons you would want to sell to an employee.
However, when considering selling your business to your children, you should keep in mind that it could tarnish relationships if done wrong. We have heard horror stories of parents seller financing their business to a child that does not continue paying them for the company. To protect yourself from this, we recommend that you have them go through a bank to receive financing.
Choose the Best Buyer For Your Business
Each type of buyer has its pros and cons, which is why it is important to pick the right one for you. Having a clear idea of what you want to achieve in the sale of your business can be helpful in determining this.
Once you have a type of buyer (or multiple) in mind, you and your broker can narrow your search for the best buyer for your business.
Learn more about the different types of buyers for your business by reading “The 5 Types of Buyers for Your Business.”
If you would like to discuss the different qualities each type of buyer has to offer, give us a call today.