Where The Buyers Are And Where The Buyers Aren't
by Alan J. Smith November 22, 2002
One of the most important elements involved in selling a company is locating the right buyer for the company. If this is not handled with expertise and precision, it can be the most time consuming and frustrating part of the dealmaking process.
Who Are The Buyers?
A breakdown in buyer types categorized from most desirable to least desirable in terms of value identifies the various potential candidates:
It is useful for a seller to understand the different type of buyers and how that will determine and influence the ultimate value and selling price for the company.
- Strategic and Synergistic Buyers are usually companies that buy businesses as a way of increasing market share, entering new markets, acquiring new technology or merging together elements of the companies that complement one another.
- Individual and Financial Buyers are interested in buying businesses where the capital invested will generate the greatest return or allow for additional capital to be invested to bring the company to new heights.
- Industry Buyers are well versed in the specific market segment and generally are looking for an opportunity to grow or expand at minimal cost. They tend to resist paying for goodwill and other expertise of the seller.
- Employees have intimate company knowledge and and a firsthand view of the day to day operations of the business. This spurs them on to be occasional acquirers of companies although they tend to see the value of the company in historic terms versus the future or strategic value of the firm.
- Family and Children (generally not the unemployed brother-in-law!!) offer an owner an opportunity to pass the business from one generation to the next. While it is the easiest means of transferring ownership of a company, it is the worst option to pursue in terms of value for obvious reasons.
Who Is The Right Buyer?
There is never a shortage of buyers in the marketplace. Unfortunately, far too many buyers in the marketplace are not qualified, in one form or another, as an appropriate candidate for a specific company. Finding the right buyer for the right company is always a formidable task. Clearly some buyers are not as committed as they would like themselves to believe. This statement could be made for individuals as well as corporations. Some buyers do not possess the financial skills, required capital or management experience to get the deal done. With this in mind, a couple of points to consider in evaluating a potential buyer are:
At our firm, we work diligently with our sellers to increase the value of the business by understanding how to position the company in the marketplace. By expanding the opportunities the company presents today along with the future expanded opportunities for the acquirer, we build enhanced value that translates into a higher selling price for the company. This type of approach produces the best results for the seller and the buyer.
- The buyer must have the necessary resources to close the transaction. If the buyer is not truly qualified, everybody loses. The buyer must demonstrate that ability. The buyer who is able to get the deal done will cooperate in that effort. The appropriate questions and measuring sticks must be employed to ascertain the qualifications of a buyer candidate.
- The right buyer is usually not identified at the outset. It takes a thoughtful process to seek out the elements of a company that can provide a strategic or synergistic fit for a buyer. This is where a seller can identify the core competencies of his/her company and use that to identify where opportunities for leverage potentially exist. At this juncture, identifying potential acquirers that are not actively seeking an acquisition who may benefit from the combined synergies can lead to the best candidate. This step in locating the right buyer is highly useful in terms of maximizing the value and ultimate selling price of the company.
Alan J. Smith is President of Bay Pacific Group, Inc. (BPG), a San Francisco based merger and acquisition firm that negotiates sales of privately held companies with $5 to $150 million in revenue. Alan can be reached at 415-420-1696 or e-mailed at email@example.com.
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