How to determine which type of buyer is right for your business
private equity investment
If you have made the decision to sell your business now or in the future, one of the fundamental questions you and your advisors will need to answer is: “What type of buyer is the ‘right’ buyer for my business?”
There are various types of business buyers, however the two types that comprise the vast majority of M&A volume are strategic buyers and private equity buyers. These buyers typically provide desirable liquidity at the right time for the business as well as resources to assist in the transition phase.
Other types of buyers include: hybrid buyers, which are strategic buyers that are backed by a private equity fund; family offices, which tend to take longer-term approaches to businesses, but are financial buyers as well; and, independent sponsors, which lack dedicated funds, but do get deals done on a one-off basis by sourcing funds deal by deal.
What is a strategic buyer?
A strategic buyer is usually in or related to your industry. They may be a competitor or might offer very similar products and services as you. They may also have minor degrees of separation whereby the consolidation of your companies makes a great deal of strategic sense. Strategic buyers tend to take very long-term approaches to buying businesses, unless they are acquiring capabilities that will make them attractive to other buyers for their own businesses.
What is a private equity buyer?
A private equity buyer is a financial buyer. They have established a dedicated fund with the primary goal of buying businesses they can eventually exit for a return. The transition usually occurs over a time horizon of 5-7 years. They may or may not have any experience in your industry, but they do have the confidence that your business has the potential for future and long-lasting growth.
Major Areas of Difference by Primary Buyer Types
For most owners, the right buyer type depends on their overall business objectives, liquidity goals (available now or in the future) and whether they are ready to exit now with cash in pocket or would like to remain engaged for a while, to earn more equity in the long run.
There are critical differences between strategic and private equity buyers. Understanding and exploring the benefits and consequences of each type, in conjunction with your business and personal goals, is important to evaluate before embarking upon a selling process.
The final factor in deciding to sell a business
In general, most owners want to know that their investments and long-lived sacrifices will result in either financial or personal reward, or both. They want to ensure that the business will continue to grow and thrive under new leadership, and that everything they have worked hard for will not be for naught.
For many, it can be quite an emotional decision. The right advising team, with real world knowledge of the issues business owners face, will provide the guidance needed for a smooth and successful exit and an outcome in which the owner is content.
If private equity seems like it could be a fit for your ownership, please review our qualifying investment targets to see if you may be a fit to work with RCP.
What else do business owners consider when deciding to sell?
Owners are concerned about the valuation of the business and want to feel as if they are getting a fair deal. However, it is my personal experience that business valuation is not the main driver in agreeing to sell.
Business owners have a list of other desired outcomes. Some I have encountered are:
- Preserving jobs for those with whom they have developed deep and personal relationships;
- Maintaining a legacy that has been developed through countless hours, days, and resources;
- Providing an ‘upside’ for current leaders who have aided in building the company into its present form;
- Still feeling like they have a ‘home’ to work out of for the remainder of their careers.
A well-defined growth strategy will help companies better achieve their goals and it is never too early to consider the various scenarios.
We recommend companies consider which growth strategies can be put in place now, even months or years before a transition or sale takes place, for the best overall results.
Roebling Capital Partners makes controlling equity investments in lower-middle-market companies who wish to expand, grow or sell their businesses.
ABOUT THE AUTHOR
Keith Carlson is Co-founder and Managing Partner at Roebling Capital Partners, a lower-middle-market private equity investment firm.
CONTACT: KCarlson@RCPprivateequity.com or 859-445-2223
