What Buyer Characteristics Are Important to the Owner?
The owner’s transaction conclusion is entirely personal and should reflect the option that would best meet the needs of the owner today, tomorrow and in the future.
As an owner selling their company, the thought process behind considering the sale of your business can be described using the flip of a coin. One side of the coin begs the question, “Am I a convincing seller?” With the flip of the coin, the opposite side begs the question, “What type of buyer am I seeking as the current owner?” The owner will often be asked just this question. Like the “why” question, the “what type of buyer” question will be indicative of the owner’s thought process for considering the sale of their business.
The flip answer to the “what type of buyer” question of course is: “The buyer that will pay the highest price.” This buyer, or the so called “strategic buyer,” can be broadly defined to include companies that have a strong business rationale for considering the acquisition. Strong business rationale includes:
- Acquiring new customers, new geographies, and new end markets,
- acquiring complementary products,
- acquiring technology and intellectual property,
- backwardly integrating,
- eliminating a competitor,
- increasing leverage with customers and/or vendors,
- consolidating production from the seller’s facility to the buyer’s facility, and
- leveraging the buyer’s overhead by reducing the seller’s overhead.
As is apparent in the foregoing list, selling a company to a strategic buyer includes a number of considerations. The first consideration is the risk associated with sharing even a modest mount of confidential information with a strategic buyer. If the transition does not close, has the strategic buyer learned anything that could damage the company? While nondisclosure agreements (“NDA’s” or “confidentiality agreements”) are universally signed, they can be difficult and costly to enforce. It is hard for the buyer to “un-remember” what they learned.
The second consideration relates to the impact on the owner’s legacy. The sale of the company to a strategic buyer could result in changing the name of the company to the name of the buyer. Does this matter to the owner? In addition, for the buyer to justify the price and achieve a return, the buyer may need to shutter the company’s facility and terminate many of its employees. Is this an acceptable outcome for the owner?
The third consideration coincides with the owner’s role in the company post-closing. If the strategic buyer plans to install its own management team and the owner wants to retire, then this is a good outcome. If the owner desires to work post-closing, then these strategic buyers, even at the highest price, may not be the best buyers for the company.
In considering the list of buyer candidates, the owner needs to determine the importance of these outcomes compared with the potential sale price. Perhaps there is a subset of strategic buyers that value the company’s “brand,” needs the capabilities and capacity of the facility, and needs most of the employees, thus mitigating these risks while supporting a high sale price.
Rather than thinking about buyer candidates from the “what buyer will pay the highest price” perspective, owners can instead think about buyer candidates that will pay the highest price while addressing a number of non-financial objectives. These objectives include:
- Honors the legacy of the seller and their family; this can be particularly important for multi-generational businesses and businesses that are located in a smaller community where the company and its owners are tightly integrated into and important to the community,
- values the business brand,
- is flexible with respect to the owner’s desire to work/work term post-closing,
- seeks to retain management and employees and create growth opportunities for them post-closing, and
- will assist in taking the company to the next phase of its lifecycle by providing capital and additional resources and support.
These buyer candidates can include private equity groups an corporate buyers that are seeking diversification.
Marketing a company to a group of candidates that can address the foregoing objectives may result in a range of values that is lower than the strategic buyer range; however, the combination of price and the ability to address the non-financial objectives of the owner may result in a better overall outcome for the owner.
In conclusion, the owner needs to calibrate i) the price that strategic buyers may offer compared to ii) the price that non-strategic buyers may offer together with the non-financial characteristics of the transaction in order to arrive at a decision that is the best outcome for the owner. The conclusion is entirely personal and the one that best meets the needs of the owner today, tomorrow and in the future.