Who Will Buy Your Business? (And How Can You Get Them to Pay More For It?)
So the time is coming, in the next couple of years, to sell your business and enjoy the next stage of your life. In your future, nothing but sunny days and sunset margaritas, as you live off the value built over years and years of blood, sweat and overcoming fears. Over the past couple of years, we have met with dozens of business owners in the same position, and very few have a clear idea of who will buy their business. So let's talk about the five most common business buyers:
Private Equity
When comparing the size of business buyers' pools of money, private equity is like the Pacific Ocean. PE funds in North America have more than $500 billion of funds with which to buy businesses (and every time I read that statistic, the number gets bigger). This represents money pooled by various individual, corporate and fund investors, and entrusted to private equity managers to invest in companies. Most are required to return the invested money and profits earned to their investors within 7-10 years, so they typically will sell their portfolio businesses in that time frame. Their objective is to buy a solid company, provide it with capital and strategic support to help it grow, and then sell it in 7-10 years at a profit. A few PE firms look for longer term investments, but that is more the exception than the rule.
A "catch" with PE buyers is that they tend to look for medium to large businesses - typically with earnings over $3 to $5 million per year. They have a lot of money to spend and prefer to own a handful of larger companies to a large number of small ones. They also prefer businesses with autonomous management teams, which is less common in owner-managed businesses. But don't get discouraged if your business is a bit smaller - there are two exceptions to the size rule. First, more and more PE firms are springing up that will look at businesses with earnings of $1 million and up (even less if there are good growth opportunities). Second, if a PE firm already has a business (or platform of businesses) in a certain industry, they might look at acquiring smaller businesses as "bolt-ons" to that platform.
Strategic Buyers
Another huge pool of business buyers, these are companies typically related in some way to your industry, who recognize some strategic or synergistic advantage to acquiring your business. They could be your competitors, suppliers or customers; or they could be companies similar to yours but operating in different regions or industry segments. Often, they perceive some way to make "2 + 2 = 5" (or in the best cases, "6" or "7"!!) and might be prepared to pay a premium to make it happen.
While the strategic buyer premium seems tempting, most business owners we talk to are understandably uncomfortable about entering negotiations, and potentially sharing their business secrets, with those in their industry. While some of this risk is unavoidable (what is seen cannot become unseen), a strong M&A advisor, working with a comprehensive confidentiality agreement and multi-level password-protected data rooms, can somewhat manage the risk.
Other Financial Buyers
This is the broad group of other potential buyers, who have the motivation and financial means to buy a business. Some have lots of money, while others will try to supplement their own capital with bank debt and vendor financing. These buyers can be hard to find, but a good M&A advisor will have a contact list of qualified buyers looking for a business.
It is always important to ensure that prospective buyers are financially qualified to complete a transaction. We regularly meet "buyers" whose eyes are much bigger than their wallets, and who expect the vendor to finance them into a business. In many circumstances that might be okay, but remember that the buyer must operate your business successfully and profitably in order to generate the cash to pay you.
Management
For many businesses, the next generation of management is the perfect purchaser. They already know the business, so the transition can have less risk than if the buyer is new to the industry. And for businesses where the goodwill is inherently attributable more to the owner(s) than to the business itself, a management buy-out can be the optimal way for the vendor to be paid for their personal goodwill. When we first talk to business owners about management buy-outs, they tend to have two objections, both which we believe can be overcome with good exit planning:
They believe that management have no money, so the vendor will have to finance the deal. While it is true that most management buy-outs involve some amount of vendor financing, banks and other lenders are more and more interested in financing these deals. A couple of lenders are even taking an equity position, which they sell back to management over time.
Vendors believe their managers don't know how to think like owners. But with a well-prepared plan, they can learn. And as important as it is for the managers to transition to owners, the selling owners need to transition to other roles in the company, to make room for the managers to step up. These transitions are equally important to the success of the management buy-out, and can be achieved through a strong transition plan.
Employees
While Employee Share Ownership Plans (ESOP's) have been very common in the USA and other countries, they have only recently gained traction in Canada - much credit should go to the ESOP Association of Canada for increasing awareness of this valuable transition option. Under these programs, employees buy shares over time, often by payroll deduction or by taking their bonuses in shares. Some plans are kickstarted by borrowing from a bank to provide employees with their initial shareholdings, and vendors with some up-front liquidity. Some programs limit employees to a minority position, while others enable employees full ownership.
There are many studies that show that employee-owned businesses have more engaged staff and superior performance. There are challenges, such as ensuring a clear division between "owner" and "employee" functions, and dealing with employees who retire or leave the company while owning shares. But there are many success-stories (look no further than Westjet) that have developed strategies to overcome these challenges.
So we have identified five groups of buyers - but we promised to tell you how to get them to pay MORE for your business (look up - it's right in the subtitle). That's where a great exit plan comes in. Starting 3-5 years before selling your company, try to identify who are the likely buyers of your business, and figure out what will add value for them. For example, if you believe private equity buyers will be interested in your business, then strengthen your management team and make yourself redundant to the operations of the business. Document and regularly update your 3-5 year strategic plan. And ensure your information systems are stable and providing accurate and relevant information to managers to support strong decisions. However, if you think strategic buyers are the most likely suitor, you may want to implement strategies to increase market share, improve sales processes and streamline product channels - conditions that might enable strategic buyers to perceive even greater synergies. And if a management buy-out seems most likely, identify those managers that might be the best candidates, and start grooming them for increased strategic roles.
The concept is simple. Figure out who is likely to buy your business, and then implement strategies to enhance its value in their eyes. Applying the concept is not so simple, especially while you are busy running your business. That's when a business transition advisor can come in very handy.
Exit Options Analysis is Step 4 of our 6-step Value Enhancement and Exit Readiness (VEER) Assessment.So the time is coming, in the next couple of years, to sell your business and enjoy the next stage of your life. In your future, nothing but sunny days and sunset margaritas, as you live off the value built over years and years of blood, sweat and overcoming fears. Over the past couple of years, we have met with dozens of business owners in the same position, and very few have a clear idea of who will buy their business. So let's talk about the five most common business buyers:
Private Equity
When comparing the size of business buyers' pools of money, private equity is like the Pacific Ocean. PE funds in North America have more than $500 billion of funds with which to buy businesses (and every time I read that statistic, the number gets bigger). This represents money pooled by various individual, corporate and fund investors, and entrusted to private equity managers to invest in companies. Most are required to return the invested money and profits earned to their investors within 7-10 years, so they typically will sell their portfolio businesses in that time frame. Their objective is to buy a solid company, provide it with capital and strategic support to help it grow, and then sell it in 7-10 years at a profit. A few PE firms look for longer term investments, but that is more the exception than the rule.
A "catch" with PE buyers is that they tend to look for medium to large businesses - typically with earnings over $3 to $5 million per year. They have a lot of money to spend and prefer to own a handful of larger companies to a large number of small ones. They also prefer businesses with autonomous management teams, which is less common in owner-managed businesses. But don't get discouraged if your business is a bit smaller - there are two exceptions to the size rule. First, more and more PE firms are springing up that will look at businesses with earnings of $1 million and up (even less if there are good growth opportunities). Second, if a PE firm already has a business (or platform of businesses) in a certain industry, they might look at acquiring smaller businesses as "bolt-ons" to that platform.
Strategic Buyers
Another huge pool of business buyers, these are companies typically related in some way to your industry, who recognize some strategic or synergistic advantage to acquiring your business. They could be your competitors, suppliers or customers; or they could be companies similar to yours but operating in different regions or industry segments. Often, they perceive some way to make "2 + 2 = 5" (or in the best cases, "6" or "7"!!) and might be prepared to pay a premium to make it happen.
While the strategic buyer premium seems tempting, most business owners we talk to are understandably uncomfortable about entering negotiations, and potentially sharing their business secrets, with those in their industry. While some of this risk is unavoidable (what is seen cannot become unseen), a strong M&A advisor, working with a comprehensive confidentiality agreement and multi-level password-protected data rooms, can somewhat manage the risk.
Other Financial Buyers
This is the broad group of other potential buyers, who have the motivation and financial means to buy a business. Some have lots of money, while others will try to supplement their own capital with bank debt and vendor financing. These buyers can be hard to find, but a good M&A advisor will have a contact list of qualified buyers looking for a business.
It is always important to ensure that prospective buyers are financially qualified to complete a transaction. We regularly meet "buyers" whose eyes are much bigger than their wallets, and who expect the vendor to finance them into a business. In many circumstances that might be okay, but remember that the buyer must operate your business successfully and profitably in order to generate the cash to pay you.
Management
For many businesses, the next generation of management is the perfect purchaser. They already know the business, so the transition can have less risk than if the buyer is new to the industry. And for businesses where the goodwill is inherently attributable more to the owner(s) than to the business itself, a management buy-out can be the optimal way for the vendor to be paid for their personal goodwill. When we first talk to business owners about management buy-outs, they tend to have two objections, both which we believe can be overcome with good exit planning:
They believe that management have no money, so the vendor will have to finance the deal. While it is true that most management buy-outs involve some amount of vendor financing, banks and other lenders are more and more interested in financing these deals. A couple of lenders are even taking an equity position, which they sell back to management over time.
Vendors believe their managers don't know how to think like owners. But with a well-prepared plan, they can learn. And as important as it is for the managers to transition to owners, the selling owners need to transition to other roles in the company, to make room for the managers to step up. These transitions are equally important to the success of the management buy-out, and can be achieved through a strong transition plan.
Employees
While Employee Share Ownership Plans (ESOP's) have been very common in the USA and other countries, they have only recently gained traction in Canada - much credit should go to the ESOP Association of Canada for increasing awareness of this valuable transition option. Under these programs, employees buy shares over time, often by payroll deduction or by taking their bonuses in shares. Some plans are kickstarted by borrowing from a bank to provide employees with their initial shareholdings, and vendors with some up-front liquidity. Some programs limit employees to a minority position, while others enable employees full ownership.
There are many studies that show that employee-owned businesses have more engaged staff and superior performance. There are challenges, such as ensuring a clear division between "owner" and "employee" functions, and dealing with employees who retire or leave the company while owning shares. But there are many success-stories (look no further than Westjet) that have developed strategies to overcome these challenges.
So we have identified five groups of buyers - but we promised to tell you how to get them to pay MORE for your business (look up - it's right in the subtitle). That's where a great exit plan comes in. Starting 3-5 years before selling your company, try to identify who are the likely buyers of your business, and figure out what will add value for them. For example, if you believe private equity buyers will be interested in your business, then strengthen your management team and make yourself redundant to the operations of the business. Document and regularly update your 3-5 year strategic plan. And ensure your information systems are stable and providing accurate and relevant information to managers to support strong decisions. However, if you think strategic buyers are the most likely suitor, you may want to implement strategies to increase market share, improve sales processes and streamline product channels - conditions that might enable strategic buyers to perceive even greater synergies. And if a management buy-out seems most likely, identify those managers that might be the best candidates, and start grooming them for increased strategic roles.
The concept is simple. Figure out who is likely to buy your business, and then implement strategies to enhance its value in their eyes. Applying the concept is not so simple, especially while you are busy running your business. That's when a business transition advisor can come in very handy.
Exit Options Analysis is Step 4 of our 6-step Value Enhancement and Exit Readiness (VEER) Assessment. See more information here, or call for a complimentary consultation.
