The Verdict in In the Sell Side: Who is the Ideal Buyer for Your Client?
By Brian Goodhart
In the world of business transactions, it’s often said that the price is just the tip of the iceberg. In this last session of our ongoing series, “The Verdict is In on the Sell Side,” we delve into a crucial aspect of selling a business: finding the ideal buyer. While price plays a significant role, there are other vital factors to consider in a transaction, as we’ll explore in this session.
The Selling Equation
To kick things off, we need to revisit the concept of the Selling Equation. Transactions encompass more than just financial considerations. Business owners often make decisions based on a blend of financial and non-financial reasons. These can include personal, professional, and emotional factors, as well as considerations related to their family, community, and employees. Neglecting these aspects can be counterproductive when approaching a sale.
The Components of the Selling Equation
Value: Naturally, the primary component of the Selling Equation is value. What will the seller receive as a result of the transaction? This is typically the monetary aspect.
Involvement: Many business owners also consider their level of involvement post-sale. Some prefer to walk away, while others want to remain involved in the company’s operations or management.
Timing: The timeline of the transaction is crucial. How quickly does the seller want to receive the value they’ve agreed upon?
Operations: Decisions about how the business will continue to operate are vital. Will the seller play an operational role after the sale?
Structure: The structure of the deal can vary widely, from asset sales to stock sales, cash payments to earn-outs. Each has its implications.
Meeting Seller Needs
A successful sale must satisfy three key elements of the Selling Equation for the seller: personal satisfaction, professional accommodation, and financial fulfillment.
- Personal Satisfaction: The seller should be content and happy with their decision. The sale should leave them feeling positive about the experience.
- Professional Accommodation: The sale should align with the seller’s professional goals and ambitions. This could include retirement or continued involvement in some capacity.
- Financial Fulfillment: The financial proceeds from the sale should meet the seller’s expectations and needs. It’s crucial to have candid conversations with financial advisors and accountants to ensure this.
Internal vs. External Buyers
In the world of potential buyers, there are two main categories: internal and external.
- Internal Buyers may include family members, employees, or the existing management team. While transitioning to these parties can be emotionally rewarding, it often requires more time and can strain relationships due to changing responsibilities.
- External Buyers are third parties outside the company. While this option offers a more abrupt separation from the business, it can be a smoother and quicker process.
Understanding External Buyer Groups
External buyers can be broadly categorized into three groups: strategic, financial, and international.
- Strategic Buyers: These buyers see the acquired business as a valuable piece of a larger puzzle. They often pay a premium because they believe they can unlock its full potential within their strategic framework.
- Financial Buyers: Financial buyers seek good businesses at fair prices with the aim of achieving a required return on investment. They are willing to endure business fluctuations and tend to have a longer investment horizon.
- International Buyers: Multinational firms may seek businesses in the United States for various strategic, financial, or geographic reasons.
Choosing the Right Path
The path chosen—internal or external—will require some concessions. The seller must consider which components of the Selling Equation they are willing to compromise on. If maximum value is the goal, internal transitions often fall short, as they may not provide the strategic premium that external buyers can offer.
Key Takeaways
In the intricate world of business sales, finding the ideal buyer involves navigating a complex web of factors. Every seller has a unique combination of needs and objectives that must be met. As trusted advisors, our role is to help sellers objectively assess their options, maintain objectivity, and guide them toward the path that aligns with their Selling Equation. By doing so, we ensure that the sale satisfies not only financial needs but also personal and professional aspirations, leading to a successful and fulfilling transaction.
Brian Goodhart is Director of M&A Advisory Services for Capstone Strategic. He can be reached at bgoodhart@capstonestrategic.com His multi-part series, “The Verdict Is in on the Sell Side,” can be viewed at https://www.capstonestrategic.com/the-verdict/
