Moe Bousaid is head of the #1 Business Broker Team of First Choice Business Brokerage.
Selling your first business can be an uncomfortable experience. There is often a fear of the unknown: How much will the business sell for? How will the transition look?
Determining the best buyer for your business depends on multiple factors, although usually, the route to the quickest and strongest transaction is the best situation to protect confidentiality. The process can take many forms, but typically, a buyer will fall into one of these four categories.
A first-time buyer is a buyer who has never purchased a business before. They are often new to the purchase process, unsure of what type of business to purchase and working in the business themselves.
This type of buyer typically has one equation they’re running: “If I purchase this business for $X.00, how long will it take to earn the investment back?” A first-time buyer will typically lean more on the seller for training, education and future decision-making. However, they will often pay a higher multiple for a desirable business, as they are willing to pay to “break into the industry.”
One of the pros to this buyer is that they are less likely to get into the “nitty-gritty” business details because they’re new to the industry and likely not sure what to ask. However, a buyer new to an industry often does not know what to request in order to review and verify the income, which can lead to a cumbersome process if the business does not have detailed financials.
Overall, an offer from a first-time buyer is often a strong offer that includes an extensive training period and a somewhat light due-diligence process.
2. Strategic Buyers
The strategic buyer is acquiring the business to complement a business they already have, or they are purchasing a competitor. Strategic buyers will be different from first-time buyers in that they can eliminate some of the current expenses by using their existing staff, space, equipment, etc.
One advantage of a strategic buyer is that they have a different equation when purchasing the business, as they will have fewer expenses and thus a bigger bottom line. Another benefit is that they will likely need less training, as they will also have less of a learning curve than someone new to the industry. On the downside, because this buyer will be well-educated in the industry, they may know the same vendors and customers as you, and that can be uncomfortable while trying to sell confidentially.
Business owners often don’t want competitors shopping their business, but a competitor can be the ideal buyer. They can eliminate some expenses and yield a higher net return.
3. Private Equity Firms
Private equity firms (PEGs) make money by investing in a business that is not publicly listed. They purchase equity companies and establish a “limited partnership” in which the original owner may remain active and in control of the company, but now with the influence of the PEG.
Working with a PEG can be very beneficial to business owners. It potentially creates the opportunity to expand and improve the business in ways you might not have previously anticipated. Private equity arrangements are particularly beneficial for young businesses because they provide liquid assets with more advantageous terms than most financing opportunities.
However, PEGs typically want the buyer to continue running the business even after the sale. They will often spend a long time on due diligence. Their goal is to find ways to maximize a business’s potential. During their due diligence period, they are usually unwilling to deposit earnest money.
Working with PEGs can often be risky, as they will often bring a business off the market, tie up the seller with many requests and then decide it’s not an ideal fit and move on, all without any benefit to the seller. It’s a risk, but one with high reward potential, depending on what you are trying to achieve with your sale.
4. International Buyers
International buyers—particularly those looking to migrate to the United States—may need to operate differently. International buyers can potentially use the purchase of a business to secure an investment visa—usually an E2 Visa. To be eligible for E2 business, the buyer must generate an income of at least $50,000, and the company must employ at least three United States citizens.
The advantage to this type of seller is that an international buyer is typically willing to pay asking price or close to it, so long as the business meets the approval of their immigration attorney or counsel. But be aware that this buyer will likely be new to the industry and our country. They will often be hands-on buyers looking for guidance or advice.
A business owner who accepts an international buyer’s offer should confirm how the buyer is being advised to purchase the business. The best route for a seller is for the buyer to purchase the business and then apply for the Visa. Otherwise, the business purchase would be contingent on the Visa, which is typically a 12-month-or-more transaction.
Selling your business will be one of the largest transactions of your life, and understanding the types of buyers can help you achieve your business goals. Knowing the type of buyer you’re facing will allow you to better understand their objectives and how the transaction may go, and knowing what type of equation they are running will help you position your business to achieve top dollar.