6 Tips for Finding the Best Buyer for Your Business
It takes more than setting the right price to acquire the ideal match for buying your business.
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You want a big payoff by selling your business. But you don't want just any buyer for the business, you want the most qualified buyer. Easily, you could end up getting multiple offers from buyers that aren't offering the most money. Matching the right buyer with the right business is a painstaking process and the transfer of business ownership is time consuming. However, the more prepared you are the more successful the outcome is likely to be.
Before seeking a buyer there are some important questions that sellers should ask themselves. First off, can your business be sold? Several elements of a business make it an attractive buy. It has a solid history of profitability, for instance; a competitive advantage; a large and loyal customer base or long-term contracts with clients; and, growth opportunities. Other considerations are brand loyalty, intellectual property rights, licenses, or issued patents.
For both seller and buyer the bottom line is what's your business worth? This is evident in the valuation. You of course want maximum value for your business but setting an asking price too high could raise a red flag, scaring away potential buyers. But if you price it too low, you'll lose out.
According to the International Business Brokers Association, a company's value is determined by a compilation of factors such as sales, earnings, performance, market outlook, personnel, net book value, and the fair market replacement value of equivalent operating assets. Value is also influenced by intangible assets such as a company's brand image, industry reputation, and good will.
'It basically comes down to what the buyer is going to value and how much the buyer is going to make in future earnings,' says Andrew R. Cagnetta, president and CEO of Transworld Business Brokers in Fort Lauderdale, Florida. 'Future earnings are everything.' Cagnetta notes that some businesses earn more money after they have been acquired. 'The way that buyers value future earnings is to look at past earnings.'
Businesses are typically sold for a multiple of the earnings or cash flow, says Ken Oppeltz, managing principal at VR-Vanguard Resource Group in San Diego, California. 'Things that affect that multiple could be the type of industry; manufacturing tends to get a higher multiple than retail. Anytime you own the product or patent that is much more desirable.' Other factors are whether the business is trending up, down or flat. 'If a business is losing 20 percent share or 20 percent of its revenue over the last couple of years, then it isn't going to get the same multiple as a company with revenues that are flat or trending up,' says Oppeltz.
To get a fair and reasonable price for your business, you need good negotiating power working on your behalf. Consider hiring an intermediary, which depending on the size of the deal could be a broker (usually $10 million or less), mergers and acquisitions professional (more than $15 million), or an investment banker (a large or public company). The intermediary's job is to determine the appropriate value for your business and to find the perfect buyer to purchase it at the asking price.
Finding the right buyer is the key to a smooth transaction; it also will contribute to the continued success and growth of the business. Even if you work with an intermediary, it still behooves you to understand the process. Here are a few guidelines to help you navigate through the murky waters.
1. Who Are Your Potential Buyers?
Anyone could be a prospect. A buyer can come from your employees, customers, suppliers or competitors, says Cagnetta. People buy businesses for different reasons, and this will affect how you pitch your business to them. But generally buyers are divided into two groups: strategic and financial buyers. Strategic buyers will look at how well your business fits into their own company's long range plans. 'This could be one of your competitors or a large business that wants to enter a new market or offer a new product. If you have what they want, strategic buyers will generally pay you more than other types of buyers,' adds Cagnetta. Financial buyers are more interested in your company's profitability and stability. They could be companies or individuals with money to invest. Some will want a solid, well-managed company that requires little oversight while others may specialize in turnaround situations and will look to buy a business that they can tweak to turn a profit.
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2. Where Can You Reach Potential Buyers?
If your business is well known then word that it's for sale may be enough. But more than likely you will need to cast a wider net. You could put out feelers to people you know or use such outlets as trade publications or newspaper advertising. There are websites such as BizBuySell.com and BizQuest.com. But a broker, M&A advisor or investment banker has access to deal flow and can sift out and approach potential buyers confidentially. You don't want to risk loosing valuable clients, vendors or employees because of negative connotations that might come from putting your business on the block for sale.
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