Finding the right buyer when you sell your business

Four types of potential buyers

There are typically four types of buyers. Depending on your objectives for selling the business, choosing the right category can be straightforward or more complex.

1. Strategic buyers

A strategic buyer is typically another company operating in the same industry or a closely related one. Their primary motivation for acquiring your business isn’t solely financial return (though that’s still a factor). They are looking for strategic advantages that your business can offer to theirs.

For example, buying the right business can create synergies that lead to:

• increased market share
• cost savings
• access to new technologies, products and markets

Buyers may be willing to pay a premium for strategic fit.

“Strategic buyers are usually looking to create a growth platform and transform a cost centre into a profit centre. When the businesses are merged, duplicate processes or responsibilities are eliminated, leading to improved efficiency and capabilities,” says Hagarty.

“For a profitable and high-performing business, a sale to a third party is typically the most rewarding in terms of value.”

2. Financial partners

A financial partner is an individual or firm that provides capital to a business in exchange for a share of ownership. Their primary goal is to achieve a return on their investment through the business’s growth and eventual exit. They will focus heavily on your business’s profitability and growth potential. They will likely be less involved than a strategic buyer.

“Financial partners are seen as a nice opportunity to build up the value of your business. You might sell 51% and stick around for 5-7 years preparing for a more aggressive acquisition plan,” says Hagarty.

“Financial partners could also be interested because they have businesses with similar activities to yours in their own portfolio, but they aren’t able or willing to pay a strategic partner who yields the benefits and synergies they seek. It’s a nice opportunity to increase the value of the business for the owner.”

3. Management buyout

If your existing management team has the interest and financial capacity to acquire the business, they could be a viable buyer. When a business is profitable, one or more management employees may buy out a portion of the business and get further financing from a financial institution to buy out the owner. The business profitability will reimburse the loan to the bank.

“This is often considered when an owner wants their business to evolve but stay within the community with the same employees. It would net less money, but you’d have the peace of mind knowing that you sold it to people you know and trust to do right by the company and keep existing jobs,” says Hagarty.

4. Family succession

If you have an heir who is eager to build on the business’s legacy, you could transfer ownership to them while remaining involved or walking away completely.

“If you’re looking to create wealth and pass something on to the next generation, that will involve succession planning,” says Hagarty.

According to Sarah Burrows, Assistant Professor of Entrepreneurship at Queens University’s Smith School of Business, the odds of success are stacked against the next generations.

In this video, she says, “The research suggests that 30% of family-owned businesses make it to the second generation, 12% make it to the third generation and only 3% make it to the fourth generation and beyond.”

There are many factors for these outcomes, including:

• geerational differences in mindset and communication styles
• lack of formal succession planning
• disagreements about the direction of the business

For a successful transition, Burrows recommends starting early to introduce the business to the next generation. “When that next gen is socialized at an early age… they begin to foster the emotional attachment to the firm. But also stakeholders, like employees and suppliers, get to know them,” she says.

“Once that next gen shows an interest, what are their visions and their goals for the family business? And how is that aligned or not aligned with the predecessors’?”

What to look for in a buyer

As you decide which type of buyer to consider, it’s important to ensure that their finances, strategic vision and operational factors match your goals for the sale of your business.

If you’re considering selling to a strategic buyer or financial partner, these are some questions you’ll want to ask:

• Financial resources: Can the buyer realistically finance the acquisition? Review their financial statements, proof of funds and proposed funding structure. A financially sound buyer is less likely to encounter issues during due diligence or closing.
• Valuation alignment: Does their valuation of your business align with your expectations and market realities? Understand their valuation methodology and be prepared to negotiate.
• Synergies: Does the buyer’s existing business or strategic direction align with yours? A synergistic acquisition can often lead to a higher valuation and a smoother integration.
• Growth plans: What are the buyer’s plans for your business post-acquisition? Do they intend to grow it, integrate it or significantly alter it? Understand their vision for the future of your company.
• Cultural compatibility: If you plan to stay on or if your employees will be retained, assess the cultural compatibility between your organizations. A good cultural fit can ease the transition.

“Buyers would then put in a letter of interest.”

Confidentiality is key

It’s important to avoid sharing sensitive business information with anyone as you contemplate selling your business. 

Keeping your plans confidential protects business stability by avoiding employee, customer and supplier uncertainty. It also safeguards sensitive information from competitors and prevents unwanted public speculation, ultimately preserving your negotiation leverage and minimizing competitive disadvantages.

“You don’t want to create a panic among customers and suppliers if they find out you’re for sale before you’ve told them,” says Hagarty.

Use non-disclosure agreements with all potential buyers before sharing confidential information.

Get support to find the right buyer

Ultimately, selling your business hinges on identifying the right match. Understanding the motivations and structures of potential buyers, such as strategic players seeking synergistic growth or financial partners focused on investment returns, is a critical step towards achieving your personal and financial objectives in the transaction.

Private auction

Hagarty says an invitation-only auction can net maximum value. It’s a business sale process where a seller solicits bids from a select group of potential buyers. This provides control over the bidding process and outcome.

“After identifying strategic buyers or financial investors that would be interested in your business, an M&A advisor would send a one-page teaser with no names and key information about the financial value of the business,” says Hagarty.

Mergers & acquisitions (M&A) advisors bring strategy to a sale

“The best way to get the most value from a sale is to control the process of selling your business,” says Hagarty. 

This means taking a strategic approach to the way you put your company on the market. Hagarty recommends that businesses with an EBITDA (earnings before interest, taxes, depreciation and amortization) of over $1M should seek representation by an M&A advisor.

They help businesses navigate the process of selling a business, from initial preparation to closing the deal. They offer expertise in valuation, deal structuring, negotiation and finding suitable buyers. Essentially, they act as a guide and facilitator, ensuring the transaction succeeds and maximizing the seller’s value.

“M&A advisors know the market and the value they can bring in. They can help control the process and dictate the rules of engagement.”

The right M&A advisor will have experience finding the right fit for a business of your size, in your industry. It’s important to find an M&A advisor with the appropriate amount of sophistication and experience based on the overall value of your business. The higher the value of your business, the more expertise you’ll need in an M&A advisor.

“If you’re seeking a financial partner or strategic buyer, you need to understand your selling objectives, ensure the business is ready for sale and bring in an M&A advisor to support the process,” says Hagerty.

“Selling a business is usually the most important transaction of a business owner’s life. You want to get it right by assembling the right team.”

Next step

Discover which factors affect your company’s value by downloading BDC’s free guide on Business Valuation.