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Who's going to buy your company?

As the owner of a company, you might have an idea of when you would like to sell it (and possibly retire).  You might have an idea of how much you need to get in order to sell.  But do you know who the likely buyers are and what might make them a fit for your situation?

Many business owners, especially of smaller companies, plan to transfer ownership to family members or existing management.  Another option is to sell the company to its employees through an ESOP (Employee Stock Option Plan).  In either case, the buyer is known in advance and is already heavily involved in the operations of the business.

If there is no succession plan, business owners will look to third-party buyers.  In general, these buyers fall into two classifications: strategic and financial.  These two classes of buyers may have different views on company valuation, future prospects, and the timeframe for owning the company.  It usually makes sense to speak with both to find the best buyer.

Strategic buyers are companies that are in a similar industry.  They might be competitors that are looking to add to their market share.  They could also be companies that provide a complementary product or service and are looking to broaden their scope.

Historically, strategic buyers have paid higher valuations than financial buyers.  This is because they generally gain some efficiency through the acquisition.  They might be able to consolidate operations to one facility and lower lease expenses, reduce employee count, or cross-sell products to existing customers to increase sales.

The holding period for a strategic buyer is generally long term.  The acquired company becomes part of the buyer for the foreseeable future.  For this reason, strategic buyers are usually looking to acquire 100 percent of a company.  Ownership of the selling company may be asked to help with the transition but may not be needed for more than this period.

Financial buyers are not long term buyers.  They are looking to buy a company, build it through aggressive growth strategies including acquisition, and then sell the company at a profit, generally in three to five years, but sometimes longer.  Most financial buyers fall into the category of private equity.  Because private equity funds need to sell at a future profit and they likely won’t realize any savings through the synergies that strategic buyers have, their view of valuation might be lower.

 However, financial buyers can potentially make up this difference through structuring.  Financial buyers generally want existing management and ownership to stay involved for the period of their investment.  They don’t have the operating bandwidth to run the newly acquired company.

Their strength is in supplementing management and ownership with capital, strategic planning and operational support.  As a result, financial buyers often structure a two stage sale.  In the first stage the owner sells a portion of the company (usually more than 50 percent) to the financial buyer.  They work together to grow the company and, in the second stage, they both sell to a new buyer. 

It is important to understand the differences in third party buyers if you don’t already have a buyer in place.  They tend to view acquisitions differently and, therefore, offer alternatives in pricing and structuring a deal.  Which alternative makes the most sense to a business owner is going to depend on their situation and plans.  But the best bet is to always have as many options as possible.

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Jon Wiley

Jon Wiley is a Managing Director in the Denver office of Hunter Wise Financial Group.  Hunter Wise is a national investment banking firm providing institutional financing, merger and acquisition, divestiture and advisory services, to middle market companies in a broad range of industries. Contact Jon at jwiley@hunterwise.com or 303-833-1131.

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