Are you considering a partial or complete sale of your company in the near future? A frequently asked question we get is who would buy my business and how do you have access to these buyers.
An understanding of the different buyer groups, what each wants to do with the business after they purchase it, and how this could impact your transition plans is important.
There are three primary types of buyer groups, which are:
Financial Buyers
National and regional consolidators (backed by private equity firms) who are looking to buy smaller companies and merge them into a larger company.
Strategic Buyers
These are companies in the same sector wanting to expand into your geo market or companies in the same geo market wanting your service lines.
Owner/Operator
This is a younger version of you. In other words, someone wanting to buy a business, replace your responsibilities, and run and grow it for the next 10+ years.
Financial Buyers — Buy and Sell
A financial buyer is an investor who purchases a company primarily due to the financial opportunity they feel the company presents. They often acquire companies with the intent of consolidating the company within their existing profile.
Common types of financial buyers include:
- Private equity firms
- Venture capital firms
- Hedge funds
- Family offices
Financial buyers typically buy companies with two objectives:
1. Improving the cash flow and value of the business
Specifically, they will accomplish this by:
- Improve revenue growth with better marketing and sales
- Expand the service lines and product offerings
- Improve operational and financial efficiency
- Improve the company’s recruiting and retention strategies
2. Creating a “roll-up” of several acquisitions into a larger business for resale in 5-7 years
A “roll-up” is a consolidation through the acquisition of multiple companies in the same fragmented industry.
Through implementing their strategies and improvements to enhance the individual company’s value — combined with the leverage obtained by the “multiple expansion” created at the holding company level — very attractive returns are achieved upon the holding company sale for the investor groups can be realized within the 5-7 year timeframe.
The ”multiple expansion” is a very powerful financial concept that has been used for many years. A stand-alone business could be valued at 4-6x adjusted cash flow, but when combined with 15-20 other similar companies, that multiple could be 8-12x. By combining these multiple acquisitions the financial buyer is realizing the organic growth PLUS the multiple expansion.
Financial Buyer’s Present Great Opportunities for a Partial Sale
Financial buyers often prefer the existing ownership to remain in place at least until a general manager can be hired or the operations merged into a nearby location.
Also, this is an opportunity for a partial sale and you participate in the growth. For example, then a financial buyer may make it worth your while to remain in your managerial position via a lucrative salary or by leaving you with a percentage of the company (partial sale).
Strategic Buyers — Buy and Hold
A strategic buyer is a company that is within the same (or a similar) sector. They view your business as a way to expand their current business model.
This is done either by:
- Expanding their geographic reach and acquiring a broader geographic market through the acquisition of your company
- Adding services that complement what they already cover
Ultimately, strategic buyers want to increase their market share through the expansion into new markets and geographic areas. This gives them more sustainability and can help them reduce their long-term risk.
Strategic buyers typically merge back offices with their existing operations to help achieve cost synergies. In some cases, they operate the company they acquire as a stand-alone company, although they often prefer to consolidate the company they acquire into their existing operations, which may involve merging your business name and employees.
Owner / Operator — Buy and Run
An owner / operator buyer is, in essence, a younger version of you. They are purchasing the company with the intent of managing day-to-day operations and growing the company as much as they can. They take over the current owner’s operations.
Owner / operators are looking for:
- Solid, consistent cash flow performance
- Growth potential
- Established reputation within your community
Owner / operator buyers rarely have cash on hand to purchase your company outright. Instead, the deal structure most likely includes Small Business Association (SBA) financing and/or seller financing.
Although it may require seller financing and training the buyer to take over your role as owner, selling to an owner / operator is a great way to ensure your vision and presence within your local community continues. Selling to an owner / operator can also help ensure your employees are protected.
About Search Fund
A search fund is an investment group or entrepreneur (similar to a private equity firm) that receives funding from investors. Search funds are interested in buying and managing an established company.
Unlike private equity firms, search funds have no intention of selling the company in the near future.
FAQs About The Different Types of Buyer Groups
What Buyer Group is Best for a Partial Sale?
All three buyer groups are options for a partial sale. With a financial or strategic buyer, such as a private equity consolidator, you can maintain partial ownership of your company and continue growing your business as you are now while also pulling out equity; you can then sell the remainder company in 5 to 7 years for another major payday.
I am Ready to Retire and Want to Exit Entirely. Is This an Option?
You can exit entirely no matter the buyer group you choose. Although many financial buyers and strategic buyers would like for the seller to remain involved long-term, you can plan for a swift exit as well. This is where your business broker comes into play. They negotiate on your behalf to ensure your involvement post-sale is limited and does not extend for more than a year after closing.
What Buyer Group is Best for Me?
This depends on your goals. If you are concerned with the direction of your company and want a buyer who can maintain your vision, then strategically selecting an owner / operator may be the most preferable solution. If you are less concerned with the direction of the company and simply want a swift exit with a maximum sale price and no seller financing, then a strategic or financial buyer may be best.
However, with that said, all buyer groups should be considered during a sale, and your business broker should look out for your best interest as they find the right buyer.
Find the right buyer group
with Brentwood Growth
Brentwood Growth is a sell-side business broker representing business owners in the home service and facility management sectors. This includes HVAC, plumbing, electrical, roofing, garage door, lawn care, irrigation, tank removal, and mosquito and pest.
Contact us today for more information and to receive a free business assessment.