Getting the Right Type of Buyer for Your Business

One of the biggest challenges when selling your company is to assess what kind of buyer will best suit your needs and hopes for the company, while maximising your returns.

Types of Buyer:

Generally, buyers can be categorised in four groups:

Trade – a business acquires another business for strategic development.

Private Equity (PE) – entities that buy multiples of businesses in areas that they are comfortable with to profit from in the future.

Venture Capital (VC) – entities that buy a business to grow significantly and sell on at a profit, generally over a 3-5 year period.

Angel Investors – high net worth individuals or syndicates that buy a business in an environment they’re comfortable with to grow for a longer-term return on their investment.

Which One Suits Your Business?

You can probably imagine there is no simple answer to that; it depends on many factors which include the nature of the business, its size and revenues, profitability, opportunities for scaling or whether it fits with a likely trade sale, thereby offering possibilities for either vertical or horizontal integration into an entity trading in the same or compatible arena.

To site a hypothetical example – an engineering business that has enjoyed long-terms stability, profitability and has an established client base and supply chain will appeal both within the engineering trade and to private equity investors looking to add to their portfolio.

The trade buyer will integrate the operations of the seller’s business into their own – not necessarily closing or significantly altering the business structure, but add its products, services, and expertise to the existing infrastructure. Opportunities like this can be valuable to trade buyers and the right buyer would possibly be willing to pay a higher EBITDA multiple – ultimately more money for the owners – than private equity would be comfortable with. This is because their rational for acquisition is purely financial, while a trade buyer has the additional motivation of strategic, operational or technical advancement.

Other opportunities may appeal more to PE and VC investors; some of the fastest growing areas for these are in the areas of FinTech, software, AI, data handling and service providers where the business owners are likely to get offers based on a multiple of revenue, as opposed to the traditional multiple of EBITDA. This again is dependent on the stage of the business, the potential market characteristics and scalability of the product or service.

For smaller businesses, Angel groups look at opportunities that start-ups and smaller businesses provide for return on investment from scale-up and growth. They may inject capital and leave the business owners and staff in place, taking a significant shareholding.

What Makes an Acquisition a Success?

The successful acquisition works for both seller and acquirer, but there are many factors to consider. Sellers needs to consider their motivation to sell. Retirement is common in SMEs. The company may have fulfilled what the owners set it up to do, and it’s time to move on and do other things. This will be seen by opportunist acquirers as an opportunity to acquire at a lower price than is possibly achievable. It is the sell-side brokers role to ensure that there are multiple interested parties to secure realistic offers and terms.

Some sellers are adamant that the right acquirer will maintain the business as it is and retain the staff that have helped shape the business into the success it has become. For others who built a business purely as an investment, having exited, its future is less of a concern.

In most cases, at least initially, both trade and equity buyers are likely to leave the business as is, integrating administrative processes into the larger picture. There is no set rule for this. Some businesses can be picked up and relocated easily, such as those that are IT or field service based. Others, such as those with industrial infrastructure, require detailed planning to seamlessly integrate into another facility.

The saying dictates that anything is worth only what someone is prepared to pay for it. It’s therefore an M&A advisor’s role to engage the owner in a researched and realistic valuation. If the owner goes to market alone, there must first be an understanding of valuation range in order to understand whether an interested party’s initial offer reflects true value.

To do this, both owners and advisors need to have a good level of understanding of the sectors they are working in and understand the true value of the business – it’s technical and operational merits, specialist skills and experience, and opportunities over and above it’s financial position. By understanding these attributes, the value can be enhanced.

The right acquirer will not just see and appreciate the value of the business but also be assessing the ease with which it can be integrated into a wider organisation – not just from financial perspective, the strategic perspective of product and service offerings, but also cultural considerations – how to best utilise the incoming staff and allay any fears that cultural change might induce, how to integrate software used by each entity for normal business control functions and maximise efficiency across the expanded portfolio.

The right buyer will negotiate considered terms of acquisition, perhaps seeking some deferments based on the outgoing owners retaining a consultancy (‘steadying’) role for a defined period after transaction. That buyer will have met the criteria of financial value of the business and considered the sellers’ requirements as presented by the Advisor.

They will then work together to ensure the acquisition and integration are smooth, quickly establishing relationship between the key staff in each, all motivated by the opportunities that the acquisition presents.

The objective, of course, is win-win; the outgoing owners have achieved an often life-changing personal financial event. The acquired business benefits form the resources the acquiring entity can bring to it – the acquirer has achieved significant growth opportunity and enhanced skill set that increases the profile of their business – these objectives are common regardless of the type of buyer that ultimately makes the acquisition.

The use of an advisor should always be hugely beneficial to business owner, particularly if the owner is still occupied with the day-to-day running of the business. If an owner has never been through acquisition before, the volume of work to create the marketing documentation, the due diligence, access to PE or VC contacts with interests in particular sectors is often and unexpectedly huge undertaking, particularly alongside the running of a business. Good advisors will minimise time wasting and focus the owner on providing what is needed for an efficient deal as well as be better positioned to evaluate real, rather than passing, interest.

Acqius offers a wide-range of sell-side and buy-side M&A services for SMEs, entrepreneurs, start-ups and other firms. These include exit strategy planning, valuation advice, asset divestment and potential-acquisition searches.