By Hazel Moore
No two buyers are ever the same. Individual buyers will always have their own quirks and preferences. But it can be helpful to analyse buyer types in terms of broader categories when looking to decide who you should sell to and to predict their behaviour once you engage.
The two buyer types you are most likely to come across when selling your business are financial (private equity) buyers and trade (strategic or corporate) buyers. Both types operate very differently and will likely have very different objectives from a deal, which will affect everything including how you approach them, how you interact with them, what they expect and even what the outcome will be.
This blog post gives some very high-level information; we’ll come back in future blogs to explore some of the issues and opportunities with different buyer types in more depth.
Defining your buyer
A private equity buyer is a purely financial buyer. He or she will see the transaction in financial terms as an investment opportunity to be sold for a profit in the future.
A strategic buyer is a corporate buyer. He or she will have a commercial motivation for the transaction, whether that is increased market share, reduced cost, expanding to new markets or consolidating competition.
What motivates your buyer?
Private equity buyers are investors that buy stakes in proven, profitable companies. They will expect to sell the company three to five years down the line, and so will take a predominantly financial perspective in assessing the deal. Typically, they buy a majority stake with the management team owning the rest. Questions the PE buyer will be asking include: how much do we need to pay? Is the business worth that? What will it grow by? What can it sell for in future?
Strategic buyers are corporates who will typically view your company from a commercial perspective. They will be looking for the business benefit that they will gain from the acquisition. It may be that they believe partnering with you via a transaction will add to their market share or fill a gap in their product roadmap. The top priority is potential synergies, for example in terms of revenue generation (maybe leveraging the resources they can bring), cost cutting or accelerating the product roadmap. You will need to articulate clearly how what you do fits what they need and adds value to them.
How does your buyer make decisions?
Getting sign off for a deal for a corporate generally takes much longer than for a financial buyer, and involves a lot more people. To give an example, if board-level approval for the deal is needed, it is worth remembering that the board may only meet every 4-8 weeks, and this can have a significant impact on how quickly they can move, especially if the board has other priorities and you miss a board meeting.
Private equity houses tend to have quite small teams, and their business is focused on doing deals, so decision-making will be much more straightforward. They are assessing the quality of the investment opportunity rather than a more complex commercial or strategic fit, and fewer stakeholders will need to give their “yes” or “no” vote.
Often, even if you are aiming for a full exit to trade, it can be helpful to have a few private equity buyers in the process as this can give you more leverage to apply pressure on strategic buyers to increase the urgency of their internal approval process and keep to a tighter timetable.
How your buyer sets their price
Unsurprisingly, private equity buyers are very disciplined on price. They are generally only interested in buying profitable businesses, so they will analyse financial metrics, review things like multiples of EBITDA and other comparable transactions to find out what other similar businesses are being valued at in the market. They will also model what they expect to sell the business at, and determine an expected return, which will impact the price they are willing to pay.
Your strategic buyer, however, will be more driven by what the value is to them commercially. They will certainly look at market multiples and their own valuation of the business, but their case will be built on the asset’s potential and what they deem worth paying.
Note that the pressure of competing with other buyers can also cause buyers to raise their price. Buyers will pay more in order to secure the asset if they are particularly keen to acquire, or are anxious about the competition getting ahead. My colleague, Piers, has recently published guidance on fostering competitiveness in the auction process if you need further information.
Which buyer is best?
What sort of buyer to target will entirely depend on your individual situation. You may be looking for a full exit – in which case trade may be better – or you might want to de-risk by taking some money off the table but would like to stay around and build the business with a private equity partner and exit in full later. When we begin work on a transaction with our clients, we do a significant amount of groundwork before defining the buyer list. We sit down with the management team and shareholders, we discuss their objectives, we look at the business, the market and the opportunity, as well as at the competition, and we determine the best way to meet their objectives. We’ll then discuss this with our clients, and the pros and cons of each option, before defining the target buyers and transaction strategy, tailored to each specific situation.