As a business owner looking to sell, will you be content with finding buyers for your business? Or will you not rest, and sign a deal, until you are convinced that you have found the best buyer possible? Selling a business that you have poured yourself into poses many challenges. Finding the right buyer is one of them. To meet that challenge, a business owner first must make two key decisions that will set the course for all that follows.
This article will review the complex process of finding buyers for your business. It also will consider those two critical issues – confidentiality and sale by owner – as well as methods for attracting buyers, the common types of business buyers and ways to identify the right buyer.
How do businesses attract buyers?
Experts encourage business owners to develop an exit strategy at the same time that they work up their business plan to get started. A business owner who followed that advice to the letter already knows the answer to the two key questions she must answer about selling the business. The rest must consider them now. Do I want to keep the sale as confidential as possible? Do I need a third party to conduct the sale?
The answers will open certain doors for finding buyers for your business and close others.
Why should a business owner keep the sale process under wraps? Competitors could use the news against the business as they talk to suppliers and target customers. Creditors might worry about their loans. Customers will start to look elsewhere. Employees will lose morale and update their resumes. All of these outcomes and more will tarnish a company at the very time it needs to shine for prospective buyers.
On the other hand, some businesses do not share those concerns. The owner might even conclude that announcing the sale is the best way to bring prospective buyers calling.
Let’s turn to the second issue. Does the business owner have the time, energy, experience, connections, resources, and disinterestedness to conduct the sale? If so, there are plenty of ways to begin the search for buyers.
If not, what kind of help can he get? The standard resources are brokers and M&A (merger and acquisition) firms. The owner’s role in finding buyers will shrink, but not disappear.
A business owner can look for buyers in several ways when confidentiality is not a concern, including:
- Talk to competitors, employees of competitors, key customers and suppliers. They could be ideal buyers.
- Consult with partners and leading employees. Selling to an insider is one of the simplest ways to get a deal done.
- Network with community and business associates, including your banker, lawyer and CPA.
- Think back to conventions and industry events. Did anyone seem particularly interested in the business or even ask about its sale?
- Advertise in newspapers and trade publications.
- Use websites set up for the sale of businesses (we will look more closely at these later).
Business-listing websites allow sellers to work in a public mode or a stealth mode. The means of preserving confidentiality and presenting a business on these websites suggest methods that can be applied in the brick-and-mortar world.
Several websites give business owners tools to use to reach thousands of potential buyers. The sites offer free resources that can help a business owner get a sense of the steps that must be taken to sell a business. They give information on how to prepare a business for sale, including document compilation and presentation. They have a free calculators for putting a value on a business and paid calculators for a more nuanced estimate. And, naturally, they provide articles and videos on how to advertise the sale of the business.
A step-by-step look
To keep things confidential, the sites employ identity-protecting features. They also recommend several precautions. The first few apply to advertising in general, not just on these websites, and the last few apply to confidential business sales in general.
- Create an email account that can’t be linked to the business.
- Use a P.O. box for any paper correspondence.
- Set up a phone number that is not linked to the business.
- Do not meet prospective buyers at the business.
- Let as few people as possible know about the sale. Involve only essential employees, as needed, to compile documents.
- Prequalify potential buyers. An ad should give enough information to screen out buyers that would be a bad fit. Even so, a business seller should develop a list of questions and talking points to review with a potential buyer to prequalify them. The seller also should have at hand information the buyer would want to know – but written in a way that does not disclose the business’ identity. Any serious buyer should expect this.
- Prepare a non-disclosure agreement that requires confidentiality from both parties. If a buyer prequalifies, do not provide any information that might identify the business until it is signed. Even then, be very guard about proprietary information and give only what is needed when it is needed.
- Provide a selling memorandum, also called a memorandum book or a confidential description book. Each book should have an identification number for tracking and each page should have a footnote stating that the information is confidential. This book gives a detailed description of the business, its outlook and its selling points. The websites typically provide guidance on how to compile such a book.
These listing sites generally charge a monthly fee with a minimum number of months required. Fees on one popular site range from $60 to $130 a month for sixth months. These sites include:
How do I find a potential buyer?
The steps laid out in the previous section give a taste of what it might be like to sell a business – compiling documents; determining an asking price; writing ads, non-disclosure agreements and confidential memorandum books; setting up anonymous email and phone accounts; sorting through emails for decent leads; prequalifying potential buyers. And that’s just part of the to-do list.
Here’s a sobering thought. An owner could go through all that work and still not find a buyer. If the sale of a business drags out, conditions could change and pull the rug out from under everything. Millions of dollars are at stake. This might sound like a pitch for a broker or M&A advisor, but it’s just reality.
Once a business owner decides to pay someone to handle the sale of the business, the options depend largely on the size of the business.
The business broker
Business brokers help with the sale of companies of up to $1 million or $2 million. The seller pays a commission, usually 8% to 10% of the purchase price. A good, experienced broker should have a regional network to draw from in finding buyers. Many of them also use the business-listing websites mentioned in the previous section. Their services include developing marketing materials and vetting potential buyers. A good starting point in looking for a business broker is the International Business Brokers Association, a nonprofit trade association.
The M&A advisor
An M&A advisor tends to work on more complicated, expensive deals, typically in the range of $10 million to $150 million. They help prepare the confidential “teaser” that is sent to potential buyers, which they identify through experience, networking and research. They also compile the confidential memorandum book and follow up with any prospective buyer who receives the book.
Some M&A advisors concentrate their efforts in a given deal on dozens of buyers they decide to target based on their research. Others cast a much wider net, emailing hundreds or even thousands of potential buyers nationally and even globally. The thinking is that no one can tell when a seemingly unrelated business or investor will see value in a company and turn out to be the best buyer.
M&A advisors also charge a percentage of a deal’s value for their services, but their scales and fees are more varied, reflecting the more complex deals. The same goes for investment bankers, who handle the very largest of business deals but also get involved in M&A activity.
The larger the business being sold, the fewer potential buyers there are. As these deals scale up, the M&A intermediaries try to line up suitable buyers who will bid against each other. It’s a far cry from a broker selling a Main Street business for $800,000, but there still are similarities.
Among them: It takes a long time to sell a business – often six months to a year. A big part of that problem is finding the right buyer. And the right buyer isn’t always the one paying the most money.
Find the right business buyer
Some people wish only to get the maximum amount of money from the sale of their business. Many others want something else. Business owners must decide that and communicate it to any intermediary they work with. Here are some things that might be more important than a higher purchase price:
- The overall vision and purpose of the business will remain.
- The buyer brings great passion and ideas to the table.
- The owner wants key employees to keep in their jobs.
- The possibility of significant layoffs is unacceptable. Also, any plan to close a facility and move to another city or country is unacceptable.
- The owner wishes to keep a hand in the business for a transition period.
- The payout must be made immediately and not financed.
- The deal must be structured a certain way for tax planning or estate planning purposes.
Types of business buyers
Brokers and M&A advisors divide buyers into two camps:
A strategic buyer is a company, group or individual operating in the same sector that is looking to expand or sees a good fit for the business being sold. Strategic buyers appeal to owners because they have the financial backing and experience to do justice to the business up for sale.
This category encompasses two other types:
- Individual buyers. These are financially secure entrepreneurs looking for a new challenge.
- Employees. The workers of a business can buy it through an Employee-Stock Ownership Plan (ESOP). The seller won’t get the full value of the sale immediately – it will be paid out over time – but can derive other benefits from selling to employees.
Also called Private Equity Groups, financial buyers are investors looking for opportunities to buy a business, possibly invest in it to help it grow to a certain level, and sell if for a profit. One form of financial buyer is a family office, a private company that manages the business affairs of wealthy families.
Out of the blue
Business cycles and unpredictable events can make the already difficult task of finding a buyer for your business seem impossible. Some government contracting businesses, for example, can find it hard to attract buyers because they operate in a highly specialized sector. And because government approval is needed for different parts of the sale, deals take even longer than usual.
Experienced M&A advisors will say, however, that if you cast a wide net and keep an open mind, the right buyer can turn up from an entirely unexpected corner. A buyer sometimes sees value in a company that no one else does and is willing to pay for it.
A buyer might see one particular patent or production line that would pump up its profitability, or a long-awaited chance to enter a market in a new state or country, or a customer base that it covets, or a flaw that it knows how to correct and reap the rewards.
When sending out those confidential memorandum books, a business owner and her intermediary need to put themselves in the shoes of each qualified buyer. Each book and every contact should emphasize the qualities that might appeal to each lead.
That’s the kind of effort needed to find the right buyer.
An ally in the campaign
Selling a business, especially a government contracting business, takes concentrated, relentless effort. Add talent, experience and integrity to the list. If you need help finding a buyer for your business, contact GovCon Wealth, a division of Cope Corrales. GovCon Wealth exclusively focuses on advising successful government contractors.