How to Find the Right Buyer for a Business
When it’s time to consider the sale of a business, one of the first lessons for business owners is to recognise that no two buyers will be the same. It is vitally important that the seller understands the business sale process and understands the various motivations that drive different business buyers.
Qualification of a Business Buyer
It is imperative for a seller to qualify any potential buyer at the earliest possible stage regarding their motivation and ability to complete a deal. A lot of time can be wasted, and sensitive information released to buyers who on reflection were never able or serious about the purchase of the business.
After qualification and scrutiny of the buyer’s motivations, their experience and financial ability to complete the acquisition, a high proportion of buyers will simply not “cut the mustard”. At this point, a clear and focused decision needs to be made as to whether to continue or cease discussions. This effective culling process quickly eliminates time wasters and allows time to concentrate on serious acquirers who are able to move forward.
The Marketing Process
If marketed correctly, most businesses will attract early interest from potential acquirers, this often includes friendly businesses in the same sector who have previously shown interest in acquiring the business. All potential buyers will have different reasons to want to acquire your business, they will all seem friendly and keen to discover as much about your business as possible. Marketing a business is not a one-off activity, confidential marketing must continue in full force until a deal has been agreed and Heads of Terms are signed. Regular new interest in the business provides the seller with confidence and the ability to negotiate with multiple buyers and secure the right deal.
Many buyers open negotiations hoping that the seller has not marketed the business widely or effectively with the aim of becoming the only bidder and taking control over price negotiations, a seller should not under any circumstances fall into this trap. Always remember, competitive tension from two or more buyers drives the price, it’s not the business valuation.
Confidentiality is also vitally important to the business seller, from the initial marketing stage and throughout the entire sale process. As part of the process, sensitive information will be released to potential buyers; this is likely to include business processes, staff, financials, growth plans etc. All sellers should be aware that competitors will often pose as potential buyers to gain an insight and understanding of a business operation. Sellers are generally protected by a Non-Disclosure Agreement, however a strong buyer qualification process at an early stage is the best remedy and will help avoid time wasters and keep nosey competitors at bay.
Financial Buyer Vs Strategic Buyer
Behind each buyer, the motivation to acquire will vary. A high proportion of business buyers are generally motivated by the purchase price and cost / staff reductions achievable, they are often competitive to the seller and want a quick return on investment at minimal risk and tend to focus on past financial performance. We refer to these as ‘Financial Buyers’.
Other buyers will be motivated by future growth, entry to new market sectors and complementary synergies between the two businesses, rather than cost reduction as a reason to acquire. They are not competitive to the seller and are able to identify cross-sale opportunities and develop new markets by focusing on the future growth and profits, not just the past financial performance. We refer to these as ‘Strategic Buyers’.
The Right Buyer for a Business
If the business owner has limited or no previous business sale experience, they should consider engaging a professional advisers and broker to manage the marketing, negotiation and due diligence phase on the sale. If marketed correctly, the seller should expect to receive interest from a number of qualified buyers and over time, more than one offer for the business, the more offers received within a managed exit process the better. These different offers will help the seller understand the true value of the business and will provide them with live comparisons and deal structure available from different buyers. It also puts the seller firmly in control of the negotiation process from competitive tension between motivated buyers.
The reality is a business is only worth what a buyer is prepared to pay. The greater the business synergy, market opportunity, profit potential and competitive tension, the more a buyer will be prepared to pay.
Business Seller’s should be cautious about agreeing a deal with the first buyer who shows interest, the commercial reality is all sellers should find and negotiate with a few qualified strategic buyers and only progress the sale with a buyer who is excited about the business, its future and is prepared to pay a premium purchase price.
Vexus Corporate Limited
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