Advisors have a vested interest in helping clients sell their businesses: both parties will be able to benefit from substantial new assets. Here are the three major categories of potential buyers.
1. Industry buyers
They are the most likely buyers, and 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. 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. Other strategies are vertical integration, which occurs when a strategic buyer acquires a customer or a supplier, and horizontal integration, which involves a diversification of products or services.
Then there’s the 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 are duplicated. That’s why you often see headcount reductions after an M&A transaction closes.
2. Private equity buyers
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 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.
3. Private buyers
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. Some will actively run the business, while others will hire outside managers. Several high-net-worth families have traditions of operating a portfolio of private companies.
A recent phenomenon is the search firm. This is usually a well-connected, well-educated group of partners, who have commitments of capital from private individuals who are 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.