Sellers will want to know that there are different types of buyers out there. Most of them can be grouped into different categories. Here, we list three of the most typical types and describe a few characteristics of each.
The first is what I would call a strategic buyer. This type of buyer may be someone in the same industry as the seller, a competitor, or another company who wants to expand into your market. The common theme is that the buyer is acting “strategically.” Their desire is to acquire your company because they have a specific and strategic purpose in doing so. One advantage of selling to a strategic buyer is that quite often the buyer is willing to pay a bit more depending on the “fit” of your company in their mix. They may want to eliminate some competition, or they may be after your customer base. The reasons may vary.
At the same time, there may be some downside costs. If the strategic buyer has employees with responsibilities that can be consolidated or eliminated in the acquired organization, then some employees in the seller’s organization may get laid off. Another cost might be the brand you have built over the years simply goes away. It gets absorbed.
Of the different types of buyers, the second is a private investor. This may be one or a group of individuals that want to have first-hand ownership in the company. Typically they want to be “hands-on” in their ownership and direct the company’s operation day-to-day. The private investor(s) is often relying on some form of conventional financing and their bank will expect you (the seller) to have some skin in the game. The bank will expect you to carry a bit of the financing to make sure that their borrower (your buyer) gets off to a successful start.
The final category of different types of buyers is the financial buyer. This could be a group of investors or private equity firms. This type of buyer is looking for a return on their investment—usually in the 35-50% range. They will be looking closely at your financials, as will the other types of buyers but, from a different perspective. The financial buyer wants to know how your operation fits into their risk-reward profile. The higher the risk of owning your company, the less they will pay. Likewise, the greater the reward, the more they will pay. However, there are no hard and fast rules. Each financial buyer will have their own set of disciplined guidelines that they follow.
As you can see, each of these three types of buyers approach the sale with a different set of objectives. So, it’s important to have some experienced and skilled help when understanding and negotiating with each type.