Types Of Buyers

When selling a business, it is important to know who the buyers are for privately-held businesses and why they buy. Understanding who the buyers are and their respective acquisition criteria equals better preparedness when the time comes to sell. Having realistic expectations and understanding the factors that drive value in the marketplace is key to a successful sale. Proper valuation and presentation to the most likely buyers are crucial to achieving a sale for the best price in the shortest time frame possible.

There are three main categories of buyers of privately-held small to midsize businesses:

  • The Individual Buyer
  • The Investment Buyer
  • The Strategic Buyer

Each category has distinctive characteristics and motives for making an acquisition. The price each is willing to pay is directly proportional to their motive.

The Individual Buyer Category

The Individual Buyer represents the largest number of prospective buyers for small to midsize privately-held businesses. Target companies typically have gross revenues between $500,000 to $3 million. Why? Enterprises with gross revenues under $500,000 do not provide sufficient net earnings, and those with revenues over $3 million become difficult for individuals to obtain the level of financing required and to compete with the other categories of buyers.

Most Individual Buyers seek enterprises that have full-time employees or management in place, documented operating procedures, verifiable financial records, and net earnings at least similar to their most recent salary with upside potential for growth. These qualifiers give individuals confidence in the business' continuity and stability. Having employees who can run daily operations is more appealing than a business that is highly reliant on the owner's presence or is dependent on the owner's relationships with customers.

While Individual Buyers may not always know the latest techniques for valuing businesses, they are capable of determining if the business makes enough money to earn a livable salary, pay the debt service on the new loan to purchase the business, and provide a reasonable return on their investment. These factors are the ultimate test to see if the price and terms of the deal make sense.

The Investment Buyer Category

One of the major market shifts for privately-held companies has been the growth in the number of Private Equity Groups over the last decade, with that number increasing to the thousands. The Investment Buyer's primary goal is to acquire a company, grow it, and then cash out, usually within five years through either selling the business to a public company or taking the business public themselves. They are primarily influenced by return on investment and prefer to invest in companies with gross revenues above $5 million with superior profit margins. Their targets usually have a unique business model with a sustainable and defensible market niche and position. Other traits that appeal to the Investment Buyer are strong growth opportunities, a compelling track record, a deep management team, low customer concentrations, and insulation from or a strategy to deal with import competition.

The Strategic Buyer Category

The Strategic Buyer is typically an existing contract that is looking at expanding its footprint into new service areas. Their targets are businesses that would complement their own, because combining the two would create a synergy of operations resulting in lower costs, new areas, and other advantages. Strategic Buyers are the most likely to pay more than other types of buyers, because they gain a variety of financial benefits and quick business growth.