Who Are the Potential Buyers?
Potential third-party buyers for your company can come from anywhere — your customers, suppliers, your community or industry competition. Buyers who are unrelated to you and who may be unearthed by your business broker can usually be divided into two groups: financial buyers and strategic buyers. A third group of potential buyers is composed of people you already know well: your family, managers, or employees. Finally, if your business has grown quite large and/or you're in an industry that's red-hot at the moment, you may be able to sell out to the general public via an Initial Public Offering (IPO).
Financial buyers. These types of buyers are primarily interested in your company's cash flow. They are typically individuals or companies with money to invest, and are willing to look at many different types of businesses or industries. In some cases they are corporate refugees — former executives of larger corporations who want to buy themselves a job by finding a company to actively manage. In other cases they may be holding companies that are simply looking for good returns on their investments, and who would like your current management to stay in place.
Financial buyers will scrutinize your financial statements and your assets very closely. Most are looking for a solid, well-managed company that won't need a great deal of immediate change, but there are some investors who specialize in turnaround situations and will be willing to look at companies that are not currently profitable.
Strategic buyers. Strategic buyers are those who are interested in your company's fit into their own long-range business plans. They may be one of your competitors, or a similar company from another region that wants to expand into your local area. The classic strategic buyer would be a larger company who does what you do in a nearby region. However, another possibility is a company in a related business, whose management can see that your company has strengths from which they can benefit — for example, you may already produce a product that they want to sell, or you may have distribution channels that they want to exploit. Sometimes these types of buyers — who are in related, but not completely parallel businesses — are referred to as "synergistic buyers."
Whether synergistic or competitive, strategic buyers are generally the ones who will pay you the most for your company. The better the fit, the more they will want your business and the greater the premium they will pay.
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Warning
You must be careful in speaking with competitors or people your business currently deals with directly as suppliers, vendors, or customers. Although they may be legitimately interested in buying your business, if the deal falls through, you don't want them to have gained enough information to ruin you.
It's best to let your agent deal with all potential buyers initially, revealing only enough to whet their appetite. If negotiations progress, you'll want to have them sign confidentiality agreements to protect your legal rights, but don't rely solely on the paper — you need to keep your sensitive information under lock and key until the final sales contract is signed.
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Company insiders. A third group of potential buyers for your company is your family, friends, and key employees. These people know your business from the inside, and may already have a personal stake in seeing that it survives and prospers. They may be willing to pay more for your company than an outside financial buyer would, because their inside knowledge lowers their risk.
However, the main problem with company insiders is that they frequently lack cash. You may have to finance a large part of the transaction yourself, or arrange third-party financing through a leveraged buy-out. The flip-side of this is that if you know the parties well, you may be more willing to be flexible as to terms; for example, you may be more willing to recover part of the sales price via an earnout provision, a consulting arrangement, or even a non-qualified pension plan.
Selling out to your employees en masse via an ESOP is another possibility, if your company is large enough to consider establishing this type of a plan.
Develop a list of potential buyers. You can help your broker by thinking about the people or companies you come into contact with. Think about your suppliers, customers, employees, and your local, regional, and national competitors. Do any seem to be possible candidates to be interested in purchasing your company? Are there any you would rule out, as someone you would not want to sell to? Such a list can provide a starting point for your agent, although he or she should also have an extensive list of contacts in other regions or industries from which to draw.
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