The landscape for small business sales is ever-changing. The dynamics that govern the market can be categorized as macro (economy and industry-based) factors and local (unique to you and your business) factors.
Macro factors that ultimately govern the sale of your business will include the economic cycle (recession or expansion) and the general interest level from buyers in your industry. Local factors will include the quality of your business and the competitive landscape in which you operate. These combined factors will form the foundation on which your business will be perceived when it goes to market and how much a buyer will ultimately be willing to pay.
As a seller, you won’t necessarily be able to predict the ebbs and flows of the economy, nor can you control the general level of buyer interest in your industry. The most important thing you can control is how you operate your business. Well-run businesses will almost always find a home in any market cycle, so focusing on what you can control should be your goal.
Small Business Sales: Who Are The Buyers?
On the buyer side of the equation, there are three subsets of potential acquirers with whom you should be familiar. Each buyer category comes with its own risks and rewards, and sellers should understand each well. In no specific order, they are: independent buyers, strategic buyers, and institutional buyers.
- Independent buyers: Independents are the most common buyer-type as deal sizes get smaller (business selling for $300K to $3 million). These buyers come in all shapes and sizes; they can be retired executives, couples looking for additional income, or a recent MBA graduate looking for a business to run. The biggest drawback to an independent buyer is often a lack of sufficient funds to consummate the transaction. This is because independent buyers are typically heavily reliant on debt to meet purchase terms. As such, they may require more seller financing or require a longer diligence period to interview and select banking partners. On the plus side, many independent buyers may be well-qualified to run your business and professional enough to get a deal done. Each transaction is different and a seller should consider all aspects of a deal before deciding to engage.
- Strategic buyers: Strategic buyers are competitors in your industry that might consider acquiring your business. Strategic acquisitions are made in all segments of the economy, from small businesses up to Fortune 500 companies. The biggest drawback of a strategic buyer can be a general lack of culture fit between your company and the acquirer’s; integrating two businesses is a challenge no buyer or seller should take lightly. On the plus side, strategic buyers will know your industry and likely already have ideas on how to grow or improve your business. You’ll also probably already have heard of your acquirer and have a certain level of trust in their competence. Transactions can move more swiftly under these circumstances.
- Institutional buyers: Institutional buyers are professional investors. They may be organized in different ways; some may be ‘family offices’, others private equity funds, and other corporations. The biggest drawbacks to institutional investors will likely be a lack of direct knowledge and experience in your space, although this is not always the case. Each investor in this class will also have different intentions with your business. While ValueStreet may have intentions to buy and hold your business indefinitely, many other funds will have a target date in mind to sell your business and recoup their investment. To the extent it is important to you, you should always discuss an institution’s policies and expectations around operating your business in the future. The plus side of all institutions is that these buyers are typically well-capitalized, have in-place relationships with knowledgeable professionals, and can typically close quickly and reliably.