M&A Market | Who is the right type of buyer for your business?

Knowing the right buyer type is important:

▶ You need to know who to target during the marketing phase.

▶ The buyer type needs to fit your goals post-closing with respect to remaining in the company.

▶ The buyer type needs to match your plans for legacy and employee security.

▶ If there’s seller financing, an earnout, or rollover equity, you want a buyer that is able to run the business successfully so that you get paid.

So, what are the primary types of buyers and what makes them a good fit?

INDIVIDUALS. An individual may be a great purchaser if:

▶ Your business is valued at under $5M

▶ You’re are ready to leave the business after a transition period (generally required by SBA lending rules)

STRATEGIC BUYERS

These buyers are other businesses in your industry or a related industry that could leverage your business for growth. Oftentimes, strategic buyers are competitors. Strategics can often be operating companies backed by financial buyers (so-called hybrids) seeking add-ons.

A strategic buyer could be a good fit if:

▶ You are interested in working for the company post-closing

▶ You want to maintain some ownership (rollover)

FINANCIAL BUYERS

A financial buyer is non-individual buyer that is not an operating company in your industry. Financial buyers include private equity groups, family offices, search funds, and independent sponsors that are seeking platforms.

Private equity

A PE group is a professional M&A player that may purchase your business as a platform (or as part of a roll-up for a strategic that is already in their portfolio). PE firms are now more active than ever in the lower middle market. A PE fund could be a good fit if:

▶ You want to maintain some ownership (rollover)

▶ You’re willing to become a non-owner employee

▶ Your size and valuation exclude individual purchasers

Search fund

A search fund is a buyer that has received commitments (often informally) from investors to fund a suitable transaction. A search fund could be a good fit if an individual buyer would be a good fit, but you need a buyer with more capital and willing to go through a more scrutinizing diligence process

Independent sponsor

An independent sponsor is like a search fund in that it is a buyer that has soft commitments from investors to fund a suitable deal. Unlike a search fund, they are not interested in taking on a daily role in the business post-closing. An independent sponsor could be a good fit if:

▶ You know that the deal could collapse if funding does not come through

▶ You do not have better available options

Selling to employees and family are also options worth considering.