- Vertical expansion: They wish to move down or up in the value chain, such as a beauty product manufacturer purchasing a beauty supply retailer.
- Horizontal expansion: They want to do more of what they’re already doing, such as an auto parts dealer buying a similar business.
- Edging out the competition: A company may want to buy your business to eliminate its threat to their profitability.
Synergy: This ever-popular buzzword means that the companies excel at two different things. Combining these two capabilities can reduce operational weaknesses. For example, a company with excellent locations might merge with a company that boasts a huge customer list.
Strategic buyers tend to pay the most because they have a clearly identified need.
Financial buyers are typically professional investors, though they come in many packages: investment partnerships, private equity firms, hedge funds, and many others. These buyers are concerned with hidden value and cash flow. To them, your business is a cash stream, and will be most attractive when it’s available at a low price.
Some financial buyers want the owner to continue running the business. This happens when they purchase at a low price, but believe they may be able to sell for more in the future. Financial buyers are aggressive negotiators who want a rock bottom price.
Operator buyers are like you. They want to run a business that succeeds. Their goal is to purchase your business, run it, and earn more money so they can enjoy a comfortable life. Sometimes these buyers are highly inexperienced, with unrealistic expectations of a career or life change. They may need significant assistance to manage the sale and run the business. They can be fickle, and may have difficulty securing financing. This can make these transactions a financial risk.
Operators are less skilled at negotiations. They also have more limited resources, which can significantly alter the negotiation process and timetable.
Ranking Buyer Options
There is no “right” buyer for every business, or even for every type of business. Instead, owner-operators need to know the available options, then understand how those options will affect the process of the sale, as well as its value. Consider ranking each type of buyer based on how they see you. Consider which is most and least attractive to you about each type of buyer. Then look at what’s actually available. If no financial buyers wish to purchase your business, for example, it doesn’t matter if that’s the most attractive option for your needs. Go with your next best option. Continue evaluating your ranking of each buyer type until you have a potential buyer. Your experience with that buyer may further refine your assessment of what will be most valuable to you in a sale.