One of the most critical factors in achieving a successful sale is understanding who your potential buyers are, and which one might be right for you. Not all buyers are the same; they each come with their own motivations, expectations, and deal structures. Depending on the type of exit you are planning, knowing the different types of buyers can help you tailor your approach and find the right fit for your business. In this article, we’ll break down the most common types of buyers and what they’re looking for in a deal.
1. Strategic Buyers
Strategic buyers are companies in your industry (or a related industry) that see your business as a way to enhance their own operations, expand their market share, or gain a competitive edge. If you are operating a small business, these are likely the larger well-known “primes” that you may already work with, and who have a habit of scooping up the small technology driven businesses. These are the deep-pocket, higher-paying buyers that every business strives to sell to, but they require a much stronger sales pitch.
What They’re Looking For:
- Synergies: Opportunities to cut costs, increase revenue, or improve efficiency by integrating your business with theirs.
- Market Expansion: Access to new customers, contracts, geographies, or business units.
- Technology or Intellectual Property: Proprietary technology, patents, or trade secrets that can strengthen their position in the market, and act as a springboard for future growth.
Why They’re Attractive:
Strategic buyers often pay a significant premium for businesses that align with their long-term goals, especially when innovative technologies are involved. They’re also more likely to retain key employees post-closing and maintain the brand’s legacy, versus cutting headcount and trying to recover every red cent.
Pro Tip: Show the strategic buyers how your business and technology can complement theirs and make 1 plus 1 equal more than 2.
For more insights, read our article on the role of a CPA in a business sale.
2. Financial Buyers (Private Equity Firms)
Private equity (PE) firms are investment groups that acquire businesses with the goal of generating a return for their investors, usually within a 5-year window of time. They typically focus on financial performance and growth potential.
What They’re Looking For:
- Strong Cash Flow: Businesses with consistent and predictable earnings that can service debt and provide a return on investment to the investors. Businesses that don’t require a lot of recurring capital expenditures to operate are always preferred, as this takes away from the free cash flow.
- Growth Potential: Opportunities to scale the business through operational improvements, acquisitions, or market expansion. PE buyers often have industry expertise or some other planned resources to inject into the company post-closing in order to drive growth.
- Exit Strategy: A clear path to selling the business at a higher valuation in the future, often within 3-5 years. This is the real money-maker for the PE firm. The recurring cash flow keeps the investors happy, but what brings them back for more is buying a business for 3x earnings and selling it for 6x.
Why They’re Attractive:
PE firms often bring expertise, resources, and capital to help grow your business. They’re also more likely to offer flexible deal structures, such as rollover equity, allowing you and your key team members to retain a stake in the company.
Pro Tip: De-risk your future cash flows in your financial model and be prepared to demonstrate how your business can achieve rapid growth and higher profitability under new experienced ownership.
For more financial insights, read our article on cash flow planning.
3. Individual Buyers
Individual buyers are often entrepreneurs or high-net-worth individuals looking to own and operate a business themselves.
What They’re Looking For:
- Lifestyle Fit: A business that aligns with their personal interests, experience, and goals.
- Stability: A proven track record of profitability and a loyal customer base that will transition to a new owner.
- Growth Potential: Opportunities to expand the business and increase its value over time.
Why They’re Attractive:
Individual buyers may be more emotionally invested in the business and its legacy. They’re also more likely to take a hands-on approach to management. These buyers are more appropriate for the smaller business sales with a single owner who is concerned with finding the right fit.
Pro Tip: Emphasize not only the financial return and opportunity of owning your business, but also the personal enjoyment and fulfillment.
Learn more about accounting considerations in our article on cash and accrual accounting.
4. Employee Stock Ownership Plans (ESOPs)
An ESOP is a unique type of transaction that allows your employees to become the owners of the business. This is a complex Plan that requires a lot of thinking and a strong advisory team, but can be a good fit for the right business.
What They’re Looking For:
- Sustainable Business Model: A company with stable cash flow and a strong management team to ensure long-term success.
- Employee Engagement: A culture of loyalty and commitment among employees.
- Tax Advantages: ESOPs offer significant tax benefits for sellers, including the potential to defer capital gains taxes.
Why They’re Attractive:
Selling to an ESOP allows you to reward your employees who worked hard for you, preserve your legacy, and maintain the independence of your business.
Pro Tip: Explore this opportunity with an ESOP advisor to determine if it is the right fit for you.
5. Family Offices
Family offices are private wealth management firms that manage the investments and financial affairs of ultra-high-net-worth families.
What They’re Looking For:
- Long-Term Investments: Businesses with stable, low-risk cash flow and growth potential that can generate income for future generations.
- Diversification: Opportunities to expand their investment portfolio into new industries or asset classes, including alternative investments.
- Alignment with Values: Businesses that align with the family’s mission, values, or philanthropic goals, such as an ESG portfolio of acquisitions.
Why They’re Attractive:
Family offices often take a long-term view and are less focused on short-term returns. They may also offer more flexible deal terms and a collaborative approach to ownership. Depending on the structure of the investment, it’s less likely that the Family office is under pressure to “flip” the investment, unlike the PE firm buyers
Pro Tip: Highlight how your business aligns with the family’s values and long-term vision.
6. Competitors
Competitors are companies in your industry that see your business as a way to eliminate competition, gain market share, or acquire key assets.
What They’re Looking For:
- Market Dominance: Opportunities to consolidate the industry and reduce competition.
- Key Assets: Access to your customer base, intellectual property, trade secrets, or distribution channels.
- Cost Savings: Synergies that allow them to reduce costs and improve profitability, up and down their supply chain.
Why They’re Attractive:
Competitors may be willing to pay a premium for your business to achieve strategic advantages. However, selling to a competitor is a risk in terms of cultural fit. Most sales to competitors are the result of a large check being written.
Pro Tip: Be cautious when dealing with competitors and ensure that the deal aligns with your long-term goals and be wary of them using it as a chance to gain free information about your business. A solid deal team will help protect you from these situations.
Learn how to safeguard against supply chain disruptions in our article on protecting yourself from an unpredictable supply chain.
Final Thoughts
Each of these types of buyers brings something different to the table, and likewise they each expect something different from you and your business. There are always common themes of low-risk, recurring cash flow, but the nuances beyond just the financials are worth noting. By understanding the playing field, you can start to narrow down who the likely suitors are for your business and build an effective sales deck.
Whether you’re targeting strategic buyers, private equity firms, or individual entrepreneurs, the key is to highlight what makes your business unique and valuable. By doing so, you can maximize your chances of achieving a successful sale and getting the best price. Telling your story takes time and practice, so the best time to get started putting the pieces together is 3 years before your anticipated sale date.
