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Today's independent business marketplace attracts a wide
variety of buyers eager for a piece of ownership action. Buyers of small
businesses are most likely replacing lost jobs or searching for a happier
alternative to corporate life. Buyers of mid-sized and large operations
are, typically, private investment companies seeking businesses to build
and eventually sell for a profit. This is the broadest possible look at
the types of buyers out there. Business owners considering putting their
business on the market should be aware of the finer "distinctions"
among buyers, as well as what they are looking to buy, and why.
1. Individual Buyer
This is typically an individual with substantial financial
resources, and with the type of background or experience necessary for
leading a particular operation. The individual buyer usually seeks a business
that is financially healthy, indicating a sound return on the investment
of both money and time. If these buyers do not have the amount of personal
equity required for acquisition, they most likely will turn to family
members or venture capital sources for financing. (Buyers and sellers
should be aware that, in many cases, seller financing will be an essential
element, benefitting both parties in the long run.)
Even when such sources are available, the individual buyer
will hit a strong bottom line when it comes to price. Therefore, these
buyers will usually limit themselves to transactions involving less than
$1 million, cash.
2. Strategic Buyer
This buyer is almost always a company, having as its goal
entering new markets, increasing market share, gaining new technology,
or eliminating some element of competition. In essence, it is part of
this buyer's "strategy" (hence the name) to acquire other businesses
as part of a long-term plan. Strategic buyers can be either in the same
business as the company under consideration, or a competitor. Example:
a bank in one of a state purchases or merges with one in another part
of the same state. The acquiring bank enters a new market and "eliminates"
competition at the same time.
Strategic buyers will be looking chiefly at businesses
with sales over $20 million, with a proprietary product and/or unique
market share, and effective management in place and willing to remain.
3. Synergistic Buyer
The synergistic category of buyer, like the strategic type,
is usually a company. The difference is that, with this buyer, the acquisition
or merger flows from the complementary nature of the purchasing company
and the company for sale.
Synergy means that the joining of the two companies will
produce more, or be worth more than just the sum of their parts. Example:
a large real estate company purchases a mortgage company. It can now use
its existing customers (those who buy homes) and offer them the mortgage
funds to finance their purchases. The benefits of this type of acquisition
help both companies be more competitive and profitable.
4. Industry Buyer
Sometimes known as "the buyer of last resort,"
this type is often a competitor or a highly similar operation. This buyer
already knows the industry well and, therefore, does not want to pay for
the expertise and knowledge of the seller. The industry buyer is interested
mainly in combining manufacturing facilities, consolidating overhead,
and utilizing the combined sales forces. These buyers will pay for assets
(but probably not what the seller thinks they are worth); they will not
pay for goodwill, covenants not to compete, or consulting agreements with
the seller. There can be some cases in which the industry buyer is also
a strategic buyer, with the price determined by motivation.
5. Financial Buyer
Most in evidence of all the buyer types, financial buyers
are influenced by a demonstrated return on investment, coupled with their
ability to get financing on as large a portion of the purchase price as
possible. Working on the theory that debt is the lowest cost of capital,
these buyers purchase businesses with the sole purpose of making the maximum
amount of money with the least amount of their capital invested.
Each type of buyer has distinctive characteristics that
correlate to the motivation behind the purchase of a particular company.
In addition, the price each is willing to pay for a company is directly
proportional to the motive. The relative sizes of acquisitions by different
buyer types (compressed into their broader categories), is shown in the
accompanying chart (keep in mind that all figures are approximate):
Type of Buyer Less than $3 million $3 to 10 million $10 million:
Sole Proprietors 45% 25% 5%
Public Companies 30% 20% 20%
Private Companies 10% 15% 15%
Investment Groups 20% 30% 20%
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