SELLING A BUSINESS

Apr 1, 2022

5 Types of Business Buyers Who Might Buy A Business

Just as your business has served customers and clients from all walks of life, expect your business sale process to attract different types of business buyers. 

Take it from us. We're at the core of the business sale market, within which we’ve witnessed sellers dealing with all sorts of business buyers. 

And in terms of figures, you could say that at the very least, every business listed in the open market has about 15 potential business buyers - who happen to vary in stature, composition, goals, capabilities, spending power, and needs, just to mention but a few. 

That means that as much as you might be hoping to sell the business to a like-minded entrepreneur, you never know who you’ll ultimately be facing at the opposite side of the negotiating table. 

Not that they’ll openly surrender their personal information. On the contrary, smart business buyers tend to withhold such intimate details in a bid to stay ahead of business sellers. 

However, this is one area where you wouldn’t want to get cut out. As much as Beacon’s expert business brokers are set to assist you with buyer prequalification, you might not want to be in the dark about the types of business buyers your business is attracting. 

Why It Helps Sellers To Understand The Types Of Business Buyers

In the field of marketing, there’s this popular mantra called “Know Your Audience”. Then when it comes to banking and finance, institutions tend to carry out what is known as “Know Your Customer”, or KYC in short. 

While there are minor differences between these two procedures, they share the same principal objective. Both seek to deeply understand customers in terms of:

• Who are they? 

• Where are they coming from? 

• Where are they? 

• What are their needs? 

• What are they seeking?

• What do they respond to?

• What are their risk factors?

• How much are they bringing in? 

And so forth. 

This same principle applies to business buyers. By learning about the categories of buyers in the business sale market, you get to understand what to expect from every potential buyer in terms of:

• How they are structured.

• Why they’d want to purchase your business. 

• What they intend to do with your business after the acquisition. 

• How they’d evaluate the asking price.

• What they’d prioritize while conducting due diligence. 

• How the business fits into their long-term goals.

• How much they’d be willing to pay as the sale price for the business. 

• Their interests, weaknesses, and strengths. 

What type of business buyers should you engage? 

These insights should help you formulate a solid sales strategy. 

As you prepare to hit the market, for instance, you’ll have an easy time establishing the target audience. You just need to compare your company features and goals with the interests that are commonly associated with each of the types of buyers. 

Another area where the insights come in handy is buyer screening and prequalification. You should be able to determine the best candidates for the business based on the expected strengths, weaknesses, and long-term goals for each category of profiles. 

And speaking of which, the groups additionally come with varying financial capabilities - which could mean readjusting the sale process - and possibly even the accompanying sale price - as you negotiate with different types of buyers. 

If your business happens to perform fairly well in the areas that interest your subject buyer, you’d have the upper hand in the sale price negotiations. But then with a different type of buyer, the same business properties could lose your company some points. 

To avoid such disappointments, therefore, you should have a good idea of what to highlight when negotiating with each category of buyers. Your ultimate goal should be to sell the business to the most qualified prospect at the highest possible value. 

The 5 Types of Small Business Buyers That You Might Encounter

With recent industry reports from BizBuySell pointing out that small businesses are still the most widely sought-after entities in the business sale market, you can bet that all sorts of business buyers tend to converge here. 

It’s worth noting, however, that while they come in all shapes and sizes, the business buyers are fundamentally categorized into these five types of personas:

• Individual buyers

• Strategic buyers

• Financial buyers

• Family offices

• Employees

Here’s what you should expect from each of the types of business buyers: 

 #1. Individual Buyers

Individual buyers are a lot like you. They come as sole entrepreneurs who are looking to run their own businesses. 

In most cases, you’ll find that an individual buyer is a market debutant who, after years of consideration, has finally mustered up the courage to take the plunge. 

Individual buyers come as sole entrepreneurs.

Don't be mistaken, though. Individual buyers are often not the type of people you can write off as naive or inexperienced. A majority of them are, instead, branching out into first-time business ownership after gaining years of relevant management experience in the corporate world. 

An individual buyer tends to be on the lookout for a small business that they could easily take up as an owner-operator. And in terms of dedication, they are typically very motivated to hold on to the venture for the long haul, hoping to finally expand it into a more successful business. 

Another thing that’s bound to catch the eye of such a buyer is business activities that are perfectly aligned with their personal interests. Individual buyers heavily favor the businesses that offer products and services within their area of specialization. 

Their scrutiny doesn’t stop there, though. You can expect individual buyers to additionally place special emphasis on the assets that come with the business. 

In particular, they’ll take special note of the infrastructure, real estate, inventory, and human resources. The reason is, they’d want a business with a great team of employees and just enough assets to facilitate a smooth transition. 

So, to secure the best possible sale price when engaging an individual buyer, you might want to focus on your physical assets, employee strengths, the ease of running the business, plus the personalized training lessons that they’ll be getting during the transition period. 

On the flip side, however, individual buyers happen to score poorly in purchasing power. Their budgets are substantially dwarfed by the spending power of strategic buyers and financial buyers. 

Here’s a lifeline, though. As it turns out, you could increase affordability by opening the deal up to third-party financing options. Individual buyers would, for instance, be very much interested in a business sale arrangement that supports something like an SBA loan. 

#2. Strategic Buyers

Strategic buyers, on the other hand, come in the form of companies that are seeking to expand their operations by acquiring an existing business. 

Strategic buyers come in the form of companies.

Unlike individual buyers, strategic types of business buyers are not your first time entrepreneurs or debutants. Rather, they happen to be well-seasoned veterans who already own and operate established businesses. 

And so, in a bid to grow even further, they hit the market to find entities that operate in the same industry as their businesses. Every single business that is purchased is eventually assimilated into the strategic company’s framework, from where it supplements the core operations and profits. 

The resultant synergies are meant to strengthen a strategic buyer’s bottom line. They could be trying to boost their level of competitiveness, increase their influence, venture into new markets, or perhaps complement their business with a set of new products or services. 

To achieve these objectives, strategic buyers tend to evaluate their potential acquisitions based on how they fit into their core operations. Financial performance, on the other hand, is perceived as a secondary concern. 

So, it’s possible for even a startup to score a good deal without an impressive financial history. The trick is to demonstrate how your business systems, operations, and assets are perfectly aligned with the strategic buyer’s short and long-term goals. 

Then to top it off, you could emphasize the versatile attributes that make your business customizable. Strategic business buyers commonly go for acquisitions that can be seamlessly integrated into their ecosystem. 

If you manage to negotiate your way into such a deal, the final payout could be quite handsome - as strategic buyers have no problem paying a premium price for an absolute fit. This qualifies the sales process as one of the highest rewarding exit planning options.

Here’s the kicker, though. By integrating your business with the strategic buyer's framework, the resultant synergies might end up swallowing up your beloved brand for good - consequently negating all the efforts and resources that you had put into building the brand.

Such acquisitions can also spell trouble for your employees, as the synergies often create an overlap of roles across similar departments. 

For example, your human resource and accounting teams could experience a clash of roles with their newfound colleagues who happen to serve in the same departments within the strategic buyer's company. Such cases often end with the incoming employees being dismissed because of redundancy. 

Therefore, with all these factors considered, strategic business buyers can be said to befit business owners who’d be willing to sacrifice the original brand identity and possibly even some of the employee jobs for the sake of a lucrative exit plan. 

#3. Financial Buyers

Just like strategic buyers, financial business buyers typically exist as companies. But, while their strategic counterparts obsess about how your business operations fit into their bottom line, financial buyers are more concerned about the returns that you’ve been generating. 

Financial buyers exist as companies that prioritize ROI.

The type of entities that fall under this category include but are not limited to:

• Private equity firms. 

• Hedge funds.

• High net worth individuals. 

• Venture capital firms. 

The one common interest that is shared between all these potential buyers is the burning desire to grow their earnings through investment projects. As such, they see business acquisitions as capital growth tools that they could use to generate returns and compound their earnings over time. 

Because of that, the group tends to prioritize ROI potential when evaluating prospective business purchases. Once they have your business in their sights, they’ll conduct due diligence on its financials to compare the possible risks and rewards that they should expect from the entity. 

To be more specific, the review process is normally centered around accounting documents - such as cash flow statements, income statements, balance sheets, accounts receivable, and accounts payable. 

But, the analysis doesn’t end there. Financial buyers will additionally examine the stability of your company - particularly in terms of its overall conversion rates, year-on-year growth patterns, the combined amount of industry experience, the possible threats from competitors, EBITDA records, the professional credentials of the management team, etc.

Now, to make the cut, your figures need to prove that the business is not only stable, but also capable of maintaining positive ROIs in a low-risk environment. Then to maximize the business value, you need to have a long history of sustaining an exceptionally low risk-reward ratio. 

All in all, if you get to close the deal, you can at least count on the financial buyers to keep the flame burning during and after the transition period. 

Expect them to hold nothing back as they take over the business. They’ll probably go in all guns blazing, with a strong drive to maximize the profits within the shortest possible time. 

If it all works out, the business might grow phenomenally in size plus profit. And, you never know - it could even expand into new markets at some point in the future.  

#4. Family Offices

Closely related to private equity firms are what we call “family offices”, which are registered entities that serve as some form of investment holding companies for families. This is what a wealthy family would typically use to manage their investment portfolio, as well as pass on their fortune from one generation to another. 

Family offices are owned and managed by family members.

The types of people you’d find here are affluent business-minded moguls who continue to accumulate wealth for the sake of their heirs. And to be specific, they tend to be on the lookout for highly profitable ventures offering attractive long-term returns. 

That means that you’ll need a solid account statement to sell your business to family offices. Such high net-worth individuals have been around the business world long enough to know how to discern between a struggling company and a stable one. 

Please note that “stable”, in this instance, isn’t just about your past and current profits. Rather, family offices will additionally try to establish your income potential over the long haul. Their principal objective, in the long run, is to leave their kids and grandchildren a fortune that progressively expands by the day. 

Therefore, if you happen to be approached by such a business buyer, you might want to highlight your company’s survival capabilities. They’d be willing to pay a tidy sum for a business that favorably adapts to change, requires minimal supervision, and is independent enough to remain profitable long after the founders are gone. 

On the downside, however, these opportunities are hard to come by. It’s not every day that you come across a family office that’s in the market for the right business. They, instead, prefer to build their own companies from the ground up. 

#5. Your Employees

Your ideal business buyer doesn’t have to be a third party. 

If you’re particularly conservative about your business brand and would like to maintain its current course, then you might want to consider your employees as possible buyers. They are the ones with the best experience and technical know-how to transition seamlessly and preserve the company’s traditions.  

That said, there are several ways that business owners in the US could pass on their companies to employees. 

The most direct one would be selling stock options to interested workers. Otherwise, you could perhaps work out a favorable profit-sharing plan, or maybe give them the chance to collectively purchase the business through worker cooperatives. 

You could offer each of your employees an ownership stake.

But, if you’re fine with a long-term exit plan, it would be a good idea to proceed with an Employee Stock Ownership Plan. 

ESOP, as it’s popularly known, is an employee benefit program that is meant to gradually grant workers an ownership stock in their organizations. You just need to set it up as some sort of an employee trust fund, into which the company would periodically make contributions to facilitate the acquisition of stocks. 

So, in short, you won’t be getting a lump sum payment. Instead, your employees will slowly buy into the company over an extended period of time. That means that the whole business sales process could take months or years - the choice is all yours. 

How To Find The Right Buyer For Your Business

By now, you might have already started to identify a favorite from this compilation of business buyers. 

That’s totally understandable - but, don’t commit yet. It’s a bit too early to set your mind on a specific caliber of buyers. 

You should, instead, find yourself a reputable business broker, and they’ll guide you through the whole process. 

With Beacon, for instance, you won’t have to do much. Our all-inclusive business brokerage services are structured to make the entire sales process as seamless as possible. 

You can get started today with a free business valuation. Then once we’ve established an ideal asking price for your small business, our brokers will scout far and wide for the most qualified buyers - after which they’ll further assist you through the due diligence stage, purchase agreement negotiations, plus the subsequent transition. 

Davis Porter

Content Writer

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.