There’s a lot of thought that goes into preparing your business for sale. Likely the biggest question that may be on your mind is who will buy it?
There are four types of purchasers for an existing business:
- Financial Buyers
- Strategic Buyers
Many businesses are passed on to 2nd, 3rd, and future generations of the family. The potential family purchasers are easy to identify – usually those already active in and knowledgeable about the business. Transferring the business to a family member results in minimal due diligence review and fairly light seller representations and warranties (usually limited to knowledge). All of this contributes to the sale being generally easy to accomplish.
However, there are areas of concern to the seller because seller financing is usually involved, meaning payments to the seller will come out of future profits of the business. Can the family purchasers successfully operate the business? Can the sale be structured so that the acquiring family members can afford the required monthly payments while the selling family members receive fair compensation? What happens if problems develop in the business? Will the sale be viewed as fair by others in the family?
Employees, especially key management employees who are already trained and knowledgeable about the business, are attractive purchasers. Due diligence review will be minimal, seller representations and warranties will be fairly light and usually limited to knowledge, and the sale will be easy to accomplish. But there are still concerns, especially as seller financing is usually involved, as we discussed when selling to family members.
These buyers generally are not already participating in your industry. They value a target business primarily on the historic and anticipated cash flow and the liquidation value of the assets. Bank financing is typically used, resulting in both a conservative value and a significant cash infusion from the buyer.
Financial Buyers are typically new to the industry and therefore will undertake extensive due diligence to learn about both the industry as a whole and the business in particular. All sales documents are carefully and fully reviewed and negotiated, which usually means increased time and expense for all parties. Financial Buyers typically continue to operate the business in the same location and with the same employees.
Strategic Buyers are typically already involved in the same industry, usually as a competitor or a complimentary business. They seek a strategic benefit from the purchase, such as eliminating a competitor, vertical integration, obtaining a valuable trade name or trade secret, combining operations with an existing facility, access to key employees or reducing management overhead by consolidating certain functions, such as financial and sales, etc.
These buyers typically pay a higher price than Financial Buyers. Strategic Buyers usually know the industry and therefore will focus extensive due diligence only on the company’s operations and assets. All sales documents are carefully and fully reviewed and negotiated, usually resulting in increased time and expense. Strategic Buyers frequently move the business and make significant changes soon after the closing.
You may be in a position that allows you your choice of buyers. Or there may be one that stands out clearly above other prospects. As you consider your options, keep in mind that the type of buyer dictates the sales process. For sales to Family and Employees, the company’s existing attorney and accountant can probably handle the sale, with additional assistance as needed. For sales to Financial and Strategic Buyers, some type of M&A expert or business broker will probably be required at the outset to identify prospective purchasers and to oversee the initial contacts and due diligence.
Our attorneys are here to answer any questions you have about finding a buyer for your business, and ensure the process goes smoothly.