If you are the owner of a successful business, you are regularly bombarded with solicitations from brokers who claim to have a buyer just begging to pay you top dollar for your business. You are probably sensible enough to realize that these solicitors are not the best persons to sell your business. But who is?
What we will call “Transaction Intermediaries” (TI) range from business brokers who specialize in selling Main Street restaurants and retail shops to Wall Street investment bankers who won’t touch a deal under $500 million. Good TIs are worth their weight in gold (or at least silver). That’s because they are knowledgeable in how to market your business to the right buyers and can get you a good price on good terms. They are also expensive, charging you anywhere from 5–10% of the sale price as a fee. Let’s look at TIs who specialize in the “Middle Market,” which we will define for these purposes as companies with a value ranging from $2–$50 million.
To select an appropriate TI, you must understand the dynamics of the sales process and understand how TIs operate. Many of the better TIs in this market have developed specialties—either industry specialties or specializing in categories of buyers—especially financial or strategic buyers. For this reason, a good place to start thinking about who should sell your business is to consider who is the most likely buyer of your business.
Business buyers in the Middle Market come in 2 flavors: “financial buyers” and “strategic buyers.” The classic financial buyer is a Private Equity Group (PEG). PEGs have their own capital and access to supplemental financing sources (banks, pension funds, insurance companies and a myriad of others) that allows them to go out into the market and buy businesses. They are primarily interested in a return on their investment. They are usually not interested in managing a business; therefore one of their selection criteria is that the target company has a solid management team in place that can run the business. There are many other types of financial buyers but they all have in common the fact that they are investors and not managers.
Strategic buyers on the other hand are typically larger companies in the same industry who want to acquire your business as an addition to their successful companies. They are of course interested in making money on the deal, but they view the acquisition as synergistic. Strategic buyers will usually blend the target company into their own operations and eliminate overhead and some management functions in the target because they are duplicates of what the acquirer already has in house. This is the classic situation in which the desired outcome is 2 + 2 = 5. The combined companies will be more profitable than the sum of the 2 separate companies. Strategic buyers will sometimes pay a higher price than a financial buyer because they expect to make a higher return.
... Sign In to read full Article