A successful sale begins with an understanding of the buyers. That means knowing who they are and what they are looking for, helping them form realistic expectations, and setting aside several persistent misconceptions about how and why they buy.
Who buys businesses
In smaller transactions, buyers are frequently local, often acquiring a business for the first time, and in some cases serial entrepreneurs with prior ownership experience. Many first-time buyers are in effect purchasing an occupation: they want the independence of ownership and expect to work in the business full time.
Established owners adding a location or entering a new market are another frequent source of buyers. As company size increases, financial buyers such as private equity groups and search funds, along with strategic acquirers in the same or adjacent industries, become more prominent. Strategic buyers often value operational fit with their existing business; financial buyers concentrate on cash flow, financing capacity and an eventual return on their investment.
Misconception 1: Buyers know exactly what they want
It is often assumed that buyers hold the advantage because they arrive having researched every aspect of the opportunity. In practice that is frequently not the case.
First-time buyers and serial entrepreneurs account for a large share of the market for smaller companies, and they are as susceptible as sellers to incomplete planning and unrealistic expectations. Private equity groups and corporate acquirers make mistakes as well. Buyers at every level sometimes enter negotiations without fully considering whether a business suits their skills, temperament or financial objectives, and a well-run process accounts for that.
A confidential valuation
A valuation establishes what the business would likely command today and identifies the factors that could improve its value before it goes to market.
Misconception 2: Buyers are purely rational
Because the acquisition of a business is a deliberate decision, it is tempting to assume it is a purely rational one. It rarely is. Many buyers are choosing a way of life, and in larger transactions their professional reputation or personal capital may depend on the outcome. Emotion is present on both sides of the table, and an experienced advisor plans for it.
Misconception 3: Price is the only consideration
Financial and corporate buyers are focused on returns, but price is seldom the only variable that matters to the rest of the market. Many individual buyers place equal weight on stability, on a business they can operate themselves, and on the seller’s support through the transition.
Structure matters as well. One buyer may offer more in total consideration through a seller note or an earnout, while another offers less with greater certainty of close. Understanding which type of buyer is across the table allows you to present the business appropriately and to negotiate terms that serve both parties.
To discuss the sale of your business, contact Twelve31 Advisors at 402-957-1231 or info@twelve31.com.
