If you are considering selling your small business (worth $10 Million and below), and you’re wondering where buyers will come from, here are a few tips. First, remember that there are several things you need to do to attract your target buyer, and ensure the deal is satisfactory – for you the seller, and the buyer as well. These include, but are not limited to, making sure your financials are clean, with easy to trace owner’s compensation line items; sound managerial practices are used in the day to day running of the business, and so on.
Your buyers can come from several buyer pools as highlighted below.
1) Displaced Executives. In my book Exit, I refer to buyers coming out of corporate America as “Displaced Executives.” The vast majority of small business buyers leave corporate careers to become first-time business buyers. They become operators of the business they purchase and are normally looking to replace their lost income stream. Due to their income motivation, these buyers are typically the most aggressive buyer group and will pay the highest justifiable price.
2) Competitors and Vendors. A competitor can accomplish two things in purchasing another business in their arena: one, they can grow through acquisition and, at the same time, eliminate a competitor. In my experience, competitors or vendors within the same industry are not willing to pay top dollar for a target acquisition. Competitors take a hard look at the goodwill value of the target company, which is often to the detriment of the seller.
3) Existing Employees. The old adage, “The solution many times is right in front of your nose” suffices here. A key employee certainly will know the business, the customers and suppliers, and is a logical choice to take over the company. However, key employees don’t always become good leaders/owners. Many owners feel obligated to offer the business to their key employees before looking for outside buyers.
4) Investment Groups. Often referred to as Private Equity Groups, this buyer pool is always on the lookout for suitable acquisitions for their investors. These groups usually have no interest in running the company and often want the seller to stay on in the same capacity. The acquisition becomes an additional investment for the partner’s portfolio which typically has a minimum requirement of $1 million in free cash flow. The investors are usually high net worth individuals wanting to spread their risk by having several firms under their umbrella. Poor returns on stock market investments have dramatically increased this type of buyer group.