Thinking About Who Will Buy My Business

If you are thinking about who is going to buy your business, you have already dealt with the significant core perception necessary for business strategic planning: that inevitably, voluntarily or involuntarily, with good results or bad, you will transfer your business interest. The reality check for the owner-manager of a business is the perception of and planning for the inevitable transfer of the business interest. Coming to this realization is the basis for the Prior Diligence strategy.

The owner and the business will separate, the principal unknown factor is when and what happens to business value. If you are the owner of a business interest in a profitable small to medium sized business, your primary concern should be to realize the maximum value from that interest. To be precise, “realize maximum value” means receiving the most net cash for that interest thereby converting the value in the business interest from a high risk business ownership to a personal asset held at a relatively low investment risk. This is when the sale of a business interest is a wealth-building event. The Prior Diligence strategy enables that wealth building event. The Prior Diligence strategy is described in a series of posts on the Substack called Owning a Business (rickriebesell.substack.com).

Business strategy cannot be effective if there is a denial about the inevitability of the transfer of the business. Once the inevitable transfer is acknowledged, even though the time may be impossible to know, the probable buyer and the terms of the transfer, may be envisioned. Business strategy should have a primary goal of formulating the transfer of the business to known and probable buyers for the highest possible price. This is the essence of being able to realize maximum value for the business interest of the owners of the business.

In finding a buyer, it is helpful to ask: “Do I know anyone who will give me cash for my business interest?” For most businesses, the logical purchaser is someone who knows the business and is capable of raising the cash to make the purchase. Very likely, this person is already a part of the business. Moreover, it will be easier to identify a buyer when the buyer is someone you know and someone who is familiar with the business. There is, however, a downside to selling to someone already involved in the business.

Someone in the business knows certain things that persons outside the business will pay to learn. Put another way, there are certain items of know-how or goodwill that an inside buyer will not pay for because the buyer already knows them. A person outside the business, a third-party buyer, will pay for this knowledge. Therefore, to maximize the price (the value received for the business) ideally the sale should be to a third-party buyer.

Do you know third-party buyers? Probably not. If you do not know a third-party buyer, then find one. But this search will take time, and the planning for it should be part of the strategic plan. What do you do in the interim? If you die or become disabled in this interim time what happens to the value in your business? How will it pay out to your family? For the interim, the probable buyers will be the only ones known, the ones already involved in the business and who may already be owners. There should be an owner agreement in place to assure a value for each business interest. For foreseeable trigger events (for example, death, disability, termination of employment, or withdrawal) there should be an enforceable sale at an acceptable price to provide assurance of value to each owner. The owner agreement, in addition to establishing an assured insider sale for interests in the business, also needs to provide for a transfer of a controlling, if not a total interest, to a third-party buyer. Most of the time, for all owners, receiving the maximum value for their business interests will be in the best interest of all.

To find the unknown third-party buyer, you need to role play. There are certain groups that usually contain buyers for a business: competitors, similar businesses in other markets seeking growth, and investors. Place yourself in their position, assume a requirement of rationality, and ask: “Would you buy the business interest?” If not, then ask: “Why not?” If the purchase of the business interest does not make sense, the first task is to meet the rationality test: the purchase of the business interest you have for sale must make sense for a third-party buyer. In making this determination you will be directed toward people who would have an interest. You need to interact with these potential purchasers to see if your role playing was accurate. Again, ask “Why not?” if there is no interest. This feedback is the most reliable feedback you will ever obtain about how well your business is managed.

As the owner of a small to medium sized business, there is no better way to plan and manage your business than with the contemplated buyer looking over your shoulder. Accounting must be current. Human resources records up to date and in compliance. All regulatory requirements must be met. Taxes must be paid up to date. The same diligence checklist a sophisticated buyer would use should be used to check the status of the business. This is an important part of the Prior Diligence strategy.

When you approach planning and management with the perspective of a potential buyer, you will see the things to do that make the sale more attractive. The business will become more valuable and will be sold for a higher price when the inevitable sale must take place. Rather than denying the inevitable separation of the owner from the business will happen, plan for the sale and provide for a transfer for maximum value to a third-party buyer. 

Who might this buyer be? Small to medium-sized businesses can be attractive acquisition targets for various types of buyers including individuals, private equity firms, strategic buyers, family offices, holding companies, search funds, and employees.

Individual buyers are often professionals with industry expertise looking to own and operate their own business. They may use personal savings, 401(k) rollovers, or SBA acquisition loans to fund the purchase. Individual buyers typically target businesses with under $2 million in profit. Individual buyers outside the business will likely be involved in the industry of the business and may even be known to owners of the business.

Private equity firms use investor capital to acquire businesses. While they usually focus on larger companies, some private equity firms look for "bolt-on acquisitions" of smaller businesses to add to their existing portfolio companies. They may consider businesses with as little as $5 million in profit. Identifying these firms involves finding recent transactions of small to medium sized businesses and understanding the basis of the transactions.

Strategic buyers are other companies, often in the same or related industries, looking to expand their operations, gain market share, or acquire new technologies or capabilities. Often a competitor is the strategic buyer for a business – to expand a market or consolidate operations.

Family offices manage the wealth of a single wealthy family and may invest in businesses related to the industry that generated the family's wealth. They tend to have longer investment horizons and take less active roles in management compared to private equity firms. Family offices often are looking for increased returns than could be obtained with traditional investments, but will also want stability and consistent profitability.

Holding companies are companies that exist primarily to own other businesses. They generate revenue from the dividends and earnings of the companies they own. Holding companies often look to synergy opportunities between the companies they own.

Search funds typically consist of an individual (often a sophisticated manager) backed by investors, looking to acquire and operate a business. A search fund is often looking for a project that involves an opportunity that can be pursued with an existing business structure.

Employees can gradually become owners of the business through Employee Stock Ownership Plans (ESOPs). An ESOP can work very well in the right situation, but these situations are not frequent and an ESOP that does not work can be disastrous to the future of the business.

Realize that it is inevitable that you will transfer your business interest. Keep a constant vigilance to recognize who might be a third party buyer of your business who will pay cash for the maximum value of your business interest. Use the perspective of a likely third-party buyer to better understand how to make your business more valuable. Practice Prior Diligence to assure proper financial documentation, accurately valued assets, and a management team in place. These factors can make the business more attractive to potential buyers, help ensure a smoother sale process, and accomplish a wealth-building event.