Which is Better, a Financial Buyer or Strategic Buyer?

If you decide to sell your business to an outside acquirer, you’re going to have to decide between a financial and a strategic buyer—understanding the different motivations of these two buyers can be the key to getting a good price for your business.

A financial buyer is acquiring your future profit stream, so they will evaluate your business based on how much profit it is likely to make and how reliable that profit stream is likely to be. The more profit you can convince them your company will produce, the more they will pay for your business.

But there is a limit to how much they will pay, because financial buyers are playing the buy-low, sell-high game. They do not have a strategic rationale for buying your business. They don’t have an army of sales reps to sell your product or a network of retailers where your product could be merchandised. They are simply trying to get a return on their investors’ money, so they tend to buy small and mid-sized businesses using a combination of this investment layered on top of a pile of debt, and they want to buy your business as cheaply as possible with the hope of flipping it five or ten years down the road.

Because financial buyers are usually investors and not operators, they want you and your team to stick around, so they rarely buy all of a business. Instead, they buy a chunk and ask you to hold on to a tranche of equity to keep you committed.

A strategic buyer is a different cat—usually a larger company in your industry, they are evaluating your business based on what it is worth in their hands. They will try and estimate how much of their product or service they can sell if they added you into the mix. Because of their size, this can often lead to buyers who are willing and able to pay much more for your business.

Tom Franceski and his two partners had built DocStar up to 45 employees when they decided to shop the business to some Private Equity (PE) investors. The PE guys offered four to six times Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), which Franceski deemed low for a fast-growing software company.

Franceski was then approached by a strategic acquirer called Epicor, which is a global software business with a lot of customers who could use what DocStar had built. Epicor offered DocStar around two times revenue—a much fatter multiple than the PE firms were offering.

Selling In A Buyer's Market

The demographics of the Boomer transition are not very encouraging for business sellers. We are rapidly approaching the worst imbalance between small business sellers and buyers in history, and it will continue for the next 20 years.

The most generous estimate of the population born in the twenty years following the Boomers is that they are 9 million fewer (69 million vs. 78 million.) More importantly, the bulk of that group was born in the late 1970’s, when birthrates began to rise again following the “Baby Bust” of the late 60s and early 70s.

From 1953 through 1957, over 21 million children were born in the US.  From 1973 through 1977, there were only 16 million new births, 23% fewer. What happens to pricing and competition when there are four sellers for every three buyers?

If the problem was limited to the numbers alone it would still be dramatic. In addition, there are other factors that make the numerical shortfall even more pronounced. The profile of the buyers, and the values and the choices of Generation X, will exponentially increase the gap between Boomer sellers and the people to whom they expect to sell their businesses.

The value system of this buyer generation doesn’t fit the values that are predominant in Boomer entrepreneurship. The concept of devoting 50 or more hours a week to a business, and doing it for 20 years or more, is antithetical to most Gen Xers preferred lifestyles.

From 2018 to 2023 the boomers will be reaching age 65 at a rate of 10,000 a day. About 9% of those aging boomers are business owners. Even if the next generation had the same competitive instincts and work ethic as the Baby Boomers, the number of available buyers would be short by over 200 daily.

Based on the numbers alone, small business buyers will have ample choice in the marketplace. Having had little opportunity to build up savings, they won’t have much cash to put down for a successful Boomer business. This will create a large number of sellers who will be forced to finance an acquisition themselves, rather than walk away from the business with nothing.

Of course, the best Baby Boomer businesses will still find qualified buyers. In order to successfully sell in a competitive market, they will need profitability, systems, and a track record that is better than that of their competitors. If you would like to assess the status of your business and its chances for successful transition, please give us a call.


© 2014, MPN Inc.

"I Want To Sell My Business In 1-2 Years..."

Many baby boomer business owners are thinking they "are ready" to leave their business in next 1-2 years and begin their retirement or third act in life.  With the economy growing and the number of investors seeking quality businesses to buy, many are thinking it could be an opportunity to "sell high" and accomplish their financial goals.

If indeed there is a desire is to sell within 2 years, and minimal or no exit planning and pre-sale due diligence has been achieved to this point, following are a number of the key planning issues that should be addressed in the first 60 days:

  • Establish owner-based exit goals (desired buyer, sale-price, values-based goals, etc.) and do whatever possible to prepare for life after the sale. Survey data indicates most business owners are not happy in life two years after the sale of their business.

  • Select a transaction intermediary (Investment Banker or Business Broker).

  • Get an estimate of business marketability and value.

  • Begin tax planning and pre-sale due diligence.

  • Assess and, if possible, enhance business value drivers.

  • Take steps to protect the value of the business during transfer (i.e., employee incentive plans/stay bonus).

  • Select the remaining needed members of your Deal Team (i.e., CPA, M&A Attorney).

  • Review your estate plan and business continuity arrangements.

  • Make decisions pertaining to a plan for communicating your plans to employees.

This is not an exhaustive list and only represents what should happen in the first 60 days.  There is much more to do throughout the 2-year period to give yourself the best chance at a successful exit.  So, an immediate priority should be the selection of a trained and experienced Exit Planner to assist with the management of the exit planning project.  Typically someone is going to engage a knowledgeable project manager or general contractor to manage the process for building their "dream house".  In selling a business, there is much more at stake than building a dream house.


Will Selling (Or Not Selling) Your Business Impact Your Lifestyle In The Future?

Our fictional business owner, Baby Boomer Jane Doe, is like most owners in that her business is her largest asset and will play a central role in achieving future financial security, goals, and dreams.  Jane has been in business approximately 25 years and, as a result of the steady stream of business revenue, she has experienced a very comfortable lifestyle that includes two homes, private education for the children, annual vacations, and plenty of discretionary income.  

But now Jane wants to plan for "what's next" as she now has grandchildren in different states she wants to visit regularly and has lost the passion once enjoyed in owning and running the business.  In conversation, Jane says with a level of exasperation, "I'm just ready to leave the business...I'm done".  Jane doesn't have management or children interested in purchasing the business, no longer wants to be an owner and thinks the best exit route would be a third-party sale.  

After engaging an exit planner to lead the design and implementation of her plan to leave, Jane is alarmed and disappointed to learn that her business is worth quite a bit less than what she had estimated and that a significant increase in her investable assets will be required to do all she wants to do post-exit.  Her financial planner assessed that her "plan for life after the business" would have a price tag of at least $4 million, while her business is really worth $1 million (Note: Jane had estimated a $2 million value), she has current investable assets of $1 million, representing an "asset gap" of $2 million.  And again, Jane wants to leave now!

As Jane's exit planner continued to "expose reality" regarding her business readiness for a successful third-party sale, Jane also had to come to grips with the reality of her business not being as sellable as she had assumed.  The planner pointed to a number of "value drivers" that needed strengthening (i.e., EBITDA, capable management team, plan for growth, etc.) to make her business more attractive to either a strategic or financial buyer. 

So, if Jane chooses to sell now and is able to, all indications are that she would not receive a sufficient amount of net proceeds to facilitate her post-exit life plan.  She will either need to begin now to execute a plan to accelerate the value of her business and sell at a later date or significantly reduce her post-exit goals and lifestyle...neither of which are attractive options.  Jane is not feeling at all good about her limitations and lack of control over her current options.  

It is now clear to Jane that it would have been wise years ago to assess both her personal and business readiness and put a plan in place to accelerate the value of the business.  If the business was more sellable and highly valued she would have more options for when and how she exits.

Have you conducted an accurate financial gap analysis including an objective estimate of business value and personal financial plan?  Do you have a plan in place to systematically maximize the value of your largest asset?  Will selling (or not selling) your business affect your future lifestyle goals?  Will it be sellable as more and more baby boomer business owners put their business on the market in the next decade?

Take control of your plan now so that you exit on your own terms and conditions.  Contact us for assistance with any of these critical planning issues.

"Five Years From Now..."

We refer to it in the exit planning trade as the "perpetual five-year exit plan".  When asking a business owner when they plan to exit their business, the following is a fairly common response:  "Not sure but probably about five years from now..."  We refer to it as perpetual because it is also rather common to get the same response year after year from the same owner.  There can be numerous and varied reasons for the response, but a lack of planning is often primary. 

The problem is that if you don't start planning now, you and your business may not be ready for you to exit in five years, and it could end up being necessary for you to plan and wait for another five years in order to attain your goals.

Following is the "2018 Exit Planning To-Do List" we posted on Jan 1 as a reminder to get started and avoid the perpetual five-year plan.  Please contact us if you need help in designing or implementing your plan for a successful exit.

DECIDE WHERE YOU WANT TO GO.  Establish Clear Goals and Objectives for Exit and Your Life After Exit.

  • When do you want to leave the business? Whom do you wish to transfer/sell the business to?

  • What are your values-based and legacy exit goals?

  • What is your post-exit "life-plan"? Business owners can often regret leaving when lacking a plan for life that replaces the sense of purpose and meaning they experienced in building their business.

  • Update your Personal Financial Plan. Find out how much $$$$ you will need post-exit to do all you want to do. Is there a gap?

ASSESS WHERE YOU ARE.  Without Accurate Data All Planning Becomes Meaningless.

  • Get an accurate Business Valuation. If the business is your largest asset shouldn't you know what it really is worth to potential buyers?

  • Assess your business Value-Drivers and areas of Risk.

  • Review your Business Continuity Plan for life transitions and unexpected death or disability. Co-Owners would include a review of their Buy-Sell Agreement to ensure alignment with current goals of all owners.

  • Review Estate Plan to ensure alignment with exit goals.

DESIGN AND IMPLEMENT A PLAN.  Build Transferable Value and Enjoy a Future Exit On Your Own Terms and Conditions.

  • Which Exit Route will best accomplish your goals? Sale to Third-Party | Sale to Insiders | Transfer to Family Members | Sale to ESOP | Absentee Owner.

  • Focus on growth and profitability today. At the core of tomorrow's successful exit plan is today's profitability and plan for growth.

  • Strengthen business value drivers.

  • Update strategic financial plan for the business.

  • Do you have the right Team of Experienced Advisors for plan design and implementation?

  • Who will Manage the Exit Planning Project?

Following are some easy next steps:

Contact Us Today for a No-Obligation Exit Planning or Value Building Exploratory Meeting.  Take our Free ExitMap Readiness Assessment and Value Builder Score questionnaire.  You could also visit exitreadiness.com for Online Learning and Education.