Most owners of small and medium-sized businesses don't think about
exiting their business nor do they plan for that inevitable day. They
enjoy their work and their lifestyle. Many of them don't even realize
that their business may be an attractive acquisition target.
With about 8,000 Americans turning 60 every day, about 20% of
businesses owned by boomers will be looking for buyers within the next
three years. We are now in the initial stages of what is expected to be
the greatest wave of business transfer activity in U.S. history. This
future large-scale baby boomer exit will make for a buyer's market for
businesses rather than the seller's market that exists today.
If you have been thinking about selling, this article will help you
see your company as a potential acquirer might see it. Understanding who
the buyers are and their respective acquisition criteria equals better
preparedness when the time comes to sell. Having realistic expectations
and understanding the factors that drive value in the marketplace will
further bolster an owner's readiness for a successful sale. Proper
valuation and presentation to the most likely buyers is crucial to
achieving a sale for the best price in the shortest time frame possible.
There are three main categories of buyers of privately-held small to
midsize businesses: The Individual Buyer, The Investment Buyer, and The
Strategic Buyer. Each category has distinctive characteristics and
motives for making an acquisition. The price each is willing to pay is
directly proportional to their motive.
THE INDIVIDUAL BUYER CATEGORY
The Individual Buyer represents the largest number of prospective
buyers for small to midsize privately-held businesses. Target companies
typically have gross revenues between $200,000 to $3 million.
Enterprises with gross revenues under $200,000 do not provide sufficient
net earnings and those with revenues over $3 million become difficult
for individuals to obtain the level of financing required and to compete
with the other categories of buyers.
Most Individual Buyers seek enterprises that have full-time employees
or management in place, documented operating procedures, a diversified
customer base, verifiable financial records, and net earnings at least
similar to their most recent salary with an upside potential for growth.
These qualifiers give Individuals confidence in the business'
continuity and stability. Employees who can run daily operations is more
appealing than a business that is highly reliant on the owner's
presence or is dependent on the owner's personal relationships with
customers.
While Individual Buyers may not always know the latest techniques for
valuing businesses, they are capable of determining if the business
makes enough money to earn a livable salary, pay the debt service
on the new loan to purchase the business, and provide a reasonable
return on their investment. These factors are the ultimate test to see
if the price and terms of the deal make sense.
THE INVESTMENT BUYER CATEGORY
One of the major market shifts for privately-held companies has been
the growth in the number of Private Equity Groups over the last decade,
they number in the thousands. The Investment Buyer's primary goal is to
acquire a company, grow it, and then cash out, usually within five years
through either selling the business to a public company or taking the
business public themselves. They are primarily influenced by return on
investment and prefer to invest in companies with gross revenues in
excess of $5 million with superior profit margins. Their targets usually
have a unique business model with a sustainable and defensible market
niche and position. Other traits that appeal to the Investment Buyer are
strong growth opportunities, a compelling track record, a deep
management team, low customer concentrations, and insulation from or a
strategy to deal with import competition.
The relative
sizes of acquisitions by category of buyer (compressed into their broader categories) is shown in the accompanying Table.
THE STRATEGIC BUYER CATEGORY
The Strategic Buyer is usually a public company or a larger
privately-held company. Their targets are businesses that would
compliment their own and that by combining the two would create a
synergy of operations resulting in lower costs, new customers, and other
advantages. Strategic Buyers are the most likely to pay more than other
types of buyers because they gain a variety of financial benefits and
quick business growth.
Synergy means that joining the two companies will produce more, or be
worth more, than just the sum of their parts. Here's a simplified
example: a large real estate company purchases a mortgage company. It
can now use its existing customers (those who buy homes) and offer them
the mortgage funds to finance their purchases. The benefits of this type
of acquisition help both companies be more competitive and profitable.
Generally, Strategic Buyers target companies that have gross revenues
in excess of $2-3 million, offer unique market share not readily
available to their own company, such as opening in a new market not
previously served or obtaining product lines and/or services not
previously provided, but synergistic to their own customer base. Target
companies will be especially attractive in industries where economies of
scale are possible whereby the acquiring company can obtain significant
post-deal expense savings, such as elimination of dual facilities,
support staff, or other overhead expenses.
For a complimentary consultation:
Contact
Cecil Williams (cecil@bizbrokerflorida.com)
or call at 888-925-5055 ext.206. Visit my personal website to search
for business for sale in Florida www.bizbrokerflorida.com Also, visit our Florida Business Exchange website at www.fbxbrokers.com
