I tell business owners to think about their business exit strategy from day one. Part of that is knowing who the most likely buyer will be.
Understanding what has value to a future buyer can help you decide how you grow your business. A recent national survey of the M&A market showed which buyer types are most likely to buy companies of a certain size:
$500,00 in value: If you’re a main street business, more than 90 percent of the time your business will sell to an individual. Almost 60 percent will sell to a first time buyer, and about 35 percent will sell to a previous business owner.
With this size company, first time buyers are generally looking to get out of corporate America and be their own boss. They want to replace their salary and work a business they can sell at retirement. These are less sophisticated buyers, so be clear about how your business will maintain success.
Meanwhile a previous-business-owner-buyer is likely a serial entrepreneur who starts or buys something, builds it and sells it once it hits a certain critical mass. This buyer is looking for a company that is a more scalable than many companies in this space.
For them, it’s not just about the salary—it’s about taking something to the next level. To capture this buyer, you need to demonstrate real growth potential.
$500,000 to $1,000,000: Close to the same as above with 80+% being individual buyers and 16% companies.
$1,000,000 to $5,000,000: In this value range, individual buyers are still around, but they drop to 50 percent. Around 40 percent of these businesses will be purchased by another company, and around 10 percent will go to a private equity group (PEGs).
Generally, PEGs and corporations can pay more for your business than an individual buyer because they have the advantage of synergistic cost savings and/or growth oppertunities (where 1+1=3.) That means to maximize value, you should look at what types of companies would want to purchase your business and grow in a way that brings the most value possible to a company-type buyer.
$5,000,000 plus: In this survey, there were no individual buyers for businesses of $5 million or greater in value. Of these companies, a little over 30 percent were purchased by other companies and more than 60 percent were purchased by PEGs.
The PEG buyer looks toward the short term (four to six years) growth potential, while companies look for a longer term synergistic fit.
The reason PEGs perform so well for investors is that they don’t buy a business unless they have the exit strategy figured out. The more you can think like that up front, you’ll not only increase your odds of selling but you’ll help maximize the value.
As you consider growth options, such as adding products or services, ask yourself, “Will this make me more attractive to the right buyer group?” If it doesn’t, you might want to rethink how you allocate your resources.
Scott Bushkie is Principal of Cornerstone Business Services, a low-to-middle-market M&A firm serving the Midwest. Reach him at 888-829-9061 or [email protected]