I was recently speaking with an investment banker who told me that the vast majority of his deals are going to private equity groups and not being sold as strategic sales. I’m not sure if this means larger companies have stopped doing strategic purchases or if selling to a private equity group is just an easier road.
Even if larger companies aren’t buying smaller ones in a strategic market place you might want to position your company for this type of transaction.
I say this for two reasons. First, you’ll likely get a better price if you can find a strategic buyer. Second, you’ll have a higher probability of getting paid all of your money from the strategic buyer.
Why do you want a strategic buyer for your business? Strategic buyers can afford to pay more for your business.
There are several types of strategic sales. Your buyer might want to absorb your company into theirs. This is what happened with me when I sold my vending business. The buyer just took over our sales, routes, and systems. They no longer needed our overhead so they essentially got our gross profit with almost none of the overhead of running the business. This allowed our buyer to pay more for our business.
If we had sold to a financial buyer like a private equity group, they still would have had all of our overhead. They would not only have had our overhead, but would have added overhead with more specialists, management fees and additional debt they would have added. The financial buyer just can’t afford to pay as much for a business as a strategic buyer.
Why you’ll likely get paid from the strategic buyer. Strategic buyers tend to pay cash for the businesses they buy. If money is held in escrow it’s often not very much money and it will often be totally paid out during the first year after the sale.
With a financial buyer they will want to pay you with your operating profits. Often financial buyers want to have you hold paper or have what’s called an earn out. An earn out is a portion of the sales agreement where you are paid if certain things happen with your business. Some of those things might be additional sales you think should happen or new products coming on line.
The problem with earn outs is that you aren’t in control of your business anymore. Whether those things that trigger extra payments happen is totally out of your control.
I only consider a sale the money that you get paid up front as part of the purchase price. My experience has been that if you hold paper or have an earn out as part of your sale, getting that money is difficult. Often sellers never see the money that is promised as a deferred payment. If you see any deferred money it often involves having legal expenses as you have to sue to get money that is owed.
How can I make sure I have a strategic buyer? Sometimes it’s just timing. There appears to be a mergers and acquisition cycle. Rob Slee has found that buyers tend to work on ten-year cycles. He has found that strategic buyers often appear in the middle of the decade and the window for lots of strategic buyers is usually around three of four years per decade.
At the same time, there are always strategic buyers if you’ve positioned yourself and your company to be part of a larger organization. In the years leading up to your sale, you would do yourself a favor to understand what strategic buyers in your business look for. You will then want to work on the things in your business that will make your business attractive to a strategic buyer. This increases the chances that when it comes time for you to sell, you will find a good buyer, no matter what the selling environment is.
Selling a business is never easy. Having a good outcome with your business sale is even harder. Understanding the rules of the game and how your potential buyers are well in advance will help you make a wise decision about who and how you’re going to sell your business when the time comes.
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