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Identifying Interested Parties

The range in values that different buyers may be willing to pay for a business can vary on the reason for acquisition. Qualified buyers pay for opportunity. The buyer who perceives the greatest opportunity is the buyer willing to pay the most for your business. Identifying the “Right Buyer” requires understanding the four main classifications of organizations or individuals who are looking to acquire a business.

The Strategic Buyer

These are usually the most qualified. They almost always pay cash and buy at a premium. Typically, the Strategic Buyer is interested in acquiring a publically traded or a large private company. Their decision to buy usually revolves around considerations of economics of scale, new channels of distribution, new technologies and other integration considerations. To be attractive to a Strategic Buyer, your company should fit most, if not all, of the following criteria:

  • Sales in excess of $10 million
  • Proprietary product or process
  • Unique market presence
  • Synergistic fit with the buyer
  • Suitable management willing to stay

Sometimes, a business that does not meet these criteria can be the target of a Strategic Buyer. A good example might be a small business that could be franchised or expanded into a chain of similar locations, or has a new product your business or technology that has yet to reach its market potential.  At VR, we use our expertise to analyze your business and work to identify key features that are attractive to the Strategic Buyer.

Private Equity Groups / Sophisticated Buyers

This group of buyers emerged as a force when “merger mania” ended and buyers began to recognize the opportunities in the private sector. Lower interest rates and the access to capital have also spurred the growth of these buyers by encouraging the formation of investment groups whose acquisitions are made using a “schooled” approach. There are two distinct types of sophisticated buyers. Their acquisition criteria are as follows:

Private Equity Groups

  • Revenues from $10 million upwards to $150 million
  • Earnings of at least $1 million
  • Investment of considerable cash or equity
  • Pay 3 to 10 times EBITDA earnings
High Net-Worth Individuals or Trusts
  • Revenues of $2 million upwards to $50 million
  • Expect 6 figure minimum future earnings
  • Expect to leverage a part of the purchase
  • Expect the seller to finance part of the acquisition
  • Pay 3 to 7 times EBITDA earnings
Sophisticated Buyers sometimes acquire companies smaller than the outlined criteria if the opportunity has favorable growth potential.

Cash Flow Buyers

By far the largest group of buyers and the most common for businesses valued at less than $2 million. These buyers tend to focus solely on present and past earnings and will not typically pay a price based on future earnings. The cash flow buyer will consider a price fair if the transaction meets the following criteria:

  • Living wage typically commensurate with the initial investment
  • Modest return on the cash investment
  • P/E ratios of 1 to 4 times Discretionary Earnings
  • Seller and/or third party financing
  • Good fit with their skills and the opportunity to improve cash flow

Industry Buyers

The difference between this category of buyer and all others is the value of goodwill. That is, Industry Buyers won’t pay for it and are usually looking to acquire a company where the owner or the company itself is in some form of distress. The Industry Buyer typically will pay:

  • Liquidation value
  • Book value
  • Adjusted book value

All too often business owners who are attempting to sell their business on their own end up dealing with an Industry Buyer.

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