Who is the right type of buyer for your business?

First, you need to know who to target during the marketing phase. Second, after the sale, you want to make sure the buyer is capable of preserving your legacy and providing security for your employees. And if there’s seller financing or an earnout, that the buyer is able to run the business successfully so that you get paid.

Types of buyers

So, what are the types of buyers and what makes them a good fit under certain circumstances?

Individuals

An individual may be a great purchaser if:

• Your business is valued at under $5M,

• You’re involved in the business on a day-to-day basis and need a buyer to fill that role,

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

• You’re open to seller financing

Strategic buyers

Strategic buyers are other businesses in your industry or a related industry that could leverage your business for growth. Oftentimes, strategic buyers are competitors. 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)

• You are ok with changes – layoffs of employees in redundant roles, relocations, and name changes

• A stock sale may be better for your tax situation

• You are interested in fueling growth

Financial buyers

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

Private equity

A PE group or PEG is a professional M&A player that may purchase your business as a platform (a first purchase in an industry) 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 portion of 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

• You are ok with changes – layoffs of employees in redundant roles, relocations, and name changes

• A stock sale may be better for your tax situation

• You are interested in fueling growth

• You are willing to go through a rigorous diligence and legal process

Family offices

A family office is an office that manages investments for a single or number of high-net-worth families. A family office could be a good fit if many of the same attributes of a PE deal make sense for you.

Search fund

A search fund is a buyer that has received commitments (often informally) from investors to fund a suitable transaction. Search funds have become increasingly popular recently, and many individual purchasers now label themselves as search funds but some do not have financial backing (self-funded searchers). After closing a deal, the search fund’s lead will usually run the business personally, similar to an individual purchaser. 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 are 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. Independent sponsors usually invest in more than one company, so 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

Employees

Selling to your own employees through an employee stock ownership program or ESOP can also be a great option if:

• they can run the business

• you are ok with receiving the sales price over time and can accept the repayment risk

• you are willing to disclose the sales process to them

Family

Of course, selling to children and other family members is often a natural option. To ensure the proceeds, you should consider relying on bank financing rather than seller financing so that repayment does not become a pressure point with those you love.