If you’re considering selling your business, it’s important to find the right buyer. But who exactly is this so-called ‘right buyer?’ Your choice is between a strategic buyer – a company that operates in the same or a complementary space or industry as your company – or a financial buyer, which is an individual investment company seeking acquisitions that provide favourable profit and cash flow. The key to selecting the right buyer is to identify your personal and business goals.
The first step is to consider both your financial and non-financial objectives. When I meet with clients, I often find that they have considered the price they want or need to get for their businesses, but haven’t considered other equally important issues.
For example, I recently spoke with a business owner in his mid-forties who had been approached by someone interested in acquiring his company. Initially, he wanted to know if the transaction made sense from a financial perspective. But when we dug deeper into his objectives, we discovered that there were other factors at play.
This owner had recently had a health scare. Ensuring that his family was financially taken care of if his health problems re-emerged was very important to him. He also enjoyed building his business and engaging with his management team and really didn’t want to retire.
A good option in this case is a buyer who wouldwork with the current owner for five to 10 years to build the company and make acquisitions to accelerate growth, with the goal of eventually selling the business. This isn’t something most strategic buyers would be interested in as they typically take over management of the target company. Financial buyers, however, usually want shareholders and management to stay with the company.
In light of his objectives, I suggested looking for a private equity firm that would allow him to crystallize a substantial portion of the value of the business today while giving him the ability to continue running the business, as well as assistance in building it to increase the value tomorrow.
If you’re considering selling, here are a few factors to think about that will help you identify the right buyer:
Timeline for exiting: If you want to remain with the business for a while, a financial buyer may be a preferred partner. Strategic buyers may look to introduce their own management into the target business shortly after the transaction closes, enabling the existing owner to transition out of the business over a six-month to two-year time frame and retire or pursue other interests.
Protecting employees: A strategic buyer may want to integrate your company within their existing operations, which may translate into reducing head count at your company to achieve synergies or economies of scale. Consequently, if protecting loyal employees is a high priority, look for strategic buyers aligned with this goal. A strategic buyer entering a new market through acquisition may need to keep all existing personnel.
Maintaining company culture: In many instances, finding a buyer that shares your business values, like commitment to community, is very important. I had a client with a business in a small town. One of his primary goals in structuring the transaction was to ensure that his legacy of supporting the community and the employees remained intact. He said, “I live in this community and when I run into former employees in the local grocery store, I need to be able to look them in the eye and ask how are things going?” In some instances, it can be a challenge to find a strategic buyer that will guarantee that the company’s culture and values will be maintained.
Taking on risk: With a strategic buyer, you are likely to have little or no execution or industry risk after the transaction, unless you agree to an earn-out as part of your deal. You’ll continue to hold execution and industry risk with a financial buyer, with additional risks associated with shared governance and control. Deals with financial buyers also typically involve recapitalizing the balance sheet, meaning additional risk to ongoing operations of the business due to added leverage on the balance sheet.
The sale process is complex and starts with an open dialogue around what the owner is looking to achieve. Understanding your goals, it is then possible to develop a strategy and identify prospective buyers that are most likely to maximize the achievement of those objectives. With planning, you can execute a transaction that will be satisfactory in more ways than just financially.
Stephen Shaw is the senior vice-president and director, MNP Corporate Finance Inc.
This article was first printed in the Globe and Mail.