When you’re looking to sell your business, knowing your potential buyers is just as important as knowing your own company. There are endless types of buyers, each with their own motivations. But when it comes to private purchasers, there are three major categories: larger companies in the same industry, private equity firms, and private buyers.
Here’s how potential buyers break down.
The most likely buyer for any company is another company in the same industry.
These are called strategic buyers, because they believe the company they’re acquiring will enhance their operations. These purchasers are usually larger than the company being sold, though there are exceptions.
There are numerous reasons why a strategic buyer might undertake an acquisition. The target company may have special products or services that the buyer does not provide. Or, the seller may have geographic distribution not available to the buyer. Sometimes the company has technology the buyer is seeking, or other attributes that would be cost-prohibitive for the purchaser to develop on its own.
Another strategy for acquisitions is vertical integration, which occurs when a strategic buyer acquires a customer or a supplier, or horizontal integration, which involves a diversification of products or services.
Then there’s the basic strategy of taking out a competitor. Removing a significant competitor from the marketplace decreases competition and ultimately improves pricing and terms-of-sale positions for the buyer. Costs, primarily overhead, can be taken out of the business being purchased, because many of them are duplicated. That’s why you often see headcount reductions after an M&A transaction closes.
Private-equity firms raise large amounts of capital from both institutional investors and wealthy people. These firms acquire controlling positions in companies, and full ownership when possible. Then, they either add smaller acquisitions or grow companies organically with the help of additional capital and other resources. Finally, they sell the companies. The exit time frame for private-equity buyers is usually five to seven years.
Private equity firms tend to buy firms with EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) of at least $2 million. The higher, the better.
Sometimes companies owned by private-equity firms want to do rollups in a specific industry, adding an element of strategic buyer activity to these deals. These hybrid approaches are generally described as preferred purchasers, as they have deep-pocketed backers who can take advantage of potential synergies and consequently pay premium prices.
Our firm currently has a list of private buyers totalling 65 names. These are rich folks looking to diversify their wealth away from fixed-income investments and public-market securities. They’re excellent buyers for firms with less than $2 million in EBITDA.
Some are serial entrepreneurs who buy and sell companies — either one at a time or as part of portfolios. Some will actively run the business, while others hire outside managers. There are quite a few high-net-worth families that have a tradition of operating a portfolio of private companies.
A recent phenomenon is the search firm, which is usually a well-connected, well-educated group of partners with commitments of capital from private individuals looking to purchase and run a company. They prefer to do one transaction at a time and usually have millions of dollars in investment support.
Mark Groulx is president of AIM Group Canada Ltd., which has specialized in the sale of privately owned Canadian companies since 1990. The bulk of the firm’s transactions range in size from $5 million to $20 million.