Playing the Field

So, you have been approached or have decided to sell your business; what do you need to know to feel like it is the right decision? According to “The Art of Selling Your Business” by John Warrillow, there are three types of acquirers. This article will provide some highlights of what you need to understand about each type. Keep an open mind to your options and maximize your odds of creating competition for the sale of your business.

 

Type 1: The Individual Investor

Individual Investors are looking for smaller companies looking to replace an existing job because of being downsized or potentially having the skills to run a service company and do not want to start from scratch. A qualified Individual Investor needs to be financially established through their own funding or be able to get a loan to purchase your company. They are typically less sophisticated than a strategic buyer or a financial buyer. 

Their lack of sophistication could result in you driving a better deal with less scrutiny of your business details. Typically, they do not pay cash for an acquisition. They either borrow from a bank or ask the seller to finance. Since your loan is second in line with creditors, you need to be very careful on this key point. If they are financing through an SBA loan, make sure you understand an individual’s eligibility to use an SBA loan.

The end goal for you as the seller is to get as much cash upfront. If you are willing to finance the buyer with a loan, ensure that the upfront covers your needs and payments are “gravy,” and if the buyer fails, you are satisfied with the transaction.

 

Type 2: Private Equity Group

There are three types of PEG buyers:

  1. Multiple shareholders who buy, improve, and flip companies typically within five to seven years.
  2. A family or larger office interested in investing money in a sector, normally on behalf of wealthy shareholders, and their goal is to maintain their acquisitions on behalf of their portfolio.
  3. Individuals or groups of individuals who want to own a business and think they can run a business better than it is today. They are typically financially backed by their contacts to make the acquisition.

The PEG buyer’s game is to find businesses that they can scale or they are underperforming. Their approach is to ingest capital and more sophisticated management into their acquisitions. The end goal is to bring “business school rigor” to the smaller business mindset.

Since they are typically looking to apply a lot of debt to their acquisitions, they want to maximize return by using the business as collateral and pay off a bank loan with the profits from the business. Their target acquisitions are larger and more mature businesses that have a track record. They look for a relatively low valuation and will negotiate a front-end buyout and backend buyout. They add necessary systems, processes, and management to increase the backend buyout for the seller. This arrangement works well for sellers who are not necessarily ready to retire but like the satisfaction of receiving some money upfront. PEGs will take over and overrule your decisions with the goal of trying them up to industry standards.

Acquisition offers to give you leverage when negotiating, so listen and be savvy. A PEG is the business of buying low and selling high. They look for profitable companies for as little money and use a lot of debt to acquire their companies.

 

Type 3: Strategic Acquirer

A strategic acquirer is a company with assets that is looking to increase the value of their company by other companies. They are typically in the seller’s industry and looking to be more competitive, win more business, differentiate their services, expand into a new market, or kill off their competition. Another motivation is the ability to gain economies of scale by spreading their overhead across more revenue.

Strategic acquirers will offer a higher price and make a deal happen faster because they typically understand the businesses they are buying.   

One of the “key leverages” as a seller is to have something they may want or don’t do today. For example, maybe your service company has a niche in selling and installing water heaters. This niche could be very attractive because of your marketing, training, and processes you use today to be profitable with this service.

Keep in mind the strategic acquirer is not a person; it is a thing. It is an organization run by a CEO who reports to a board to maximize the value for their shareholders. They are in love with their company and are focused on improving their company through acquisitions.

 

Keep your mind open to the different types of buyers. Understand their motivations and be able to demonstrate the drivers that drive them. Your job is to ensure your business is consistently profitable, so no matter what type of buyer is interested, your company has the foundation to consider an acquisition.

 

Lynn Wise is the Founder and CEO of Contractor in Charge.

Service Roundtable is dedicated to growing your bottom line and helping your business maximize its full potential. These groups of contractors work together to assist you with marketing, sales, business, and so much more. Twice a month, seminars around the United States and Canada are held to network and further assist your business. Visit Service Roundtable.com to see if there are Success Days in your area.

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