Understanding the 3 Types of Buyers

Before examining each buyer type in greater detail, here’s a brief overview of the three main types of buyers in the middle market:

  1. Financial Buyers: Financial buyers primarily consist of private equity (PE) firms and value a business based predominantly on its EBITDA, without taking into account the impact of any synergies. These are some of the most common buyers of mid-sized businesses and have two principal goals – generating a high return and achieving a successful exit. Their key considerations when evaluating the attractiveness of a business are profitability and growth potential, as well as acquiring a business with a strong management team. When selling to a financial buyer, focus on building a strong management team and increasing EBITDA. 
  2. Corporate Buyers: Corporate buyers come in two types – strategic and non-strategic. While strategic buyers bring synergies to the table, non-strategic buyers don’t. Non-strategic buyers are usually direct competitors, although this rule doesn’t always hold true. While there are distinctions between these two types of corporate buyers, the goals, considerations, and tips for dealing with them remain the same.
    • Strategic: A strategic buyer is any buyer that achieves synergies as a result of the acquisition. Strategic buyers, also known as synergistic buyers, are considered the holy grail of buyers and may pay a higher multiple than others if they can’t easily replicate what your business has to offer. Strategic buyers have longer holding periods than financial buyers and usually have no defined exit plan. Strategic buyers place high importance on the synergies your business has to offer them and focus on the long-term fit of your business with theirs. When selling to a strategic buyer, focus on building value that’s difficult to replicate and hire an M&A intermediary to manage negotiations and conduct a private auction.
    • Non-Strategic: A non-strategic buyer is any buyer that doesn’t gain synergies from the acquisition. Non-strategic buyers are usually direct competitors who know your industry well and aren’t willing to pay top price unless they’re acquiring some aspect of your business they can’t easily replicate, such as a valuable customer list. If your business is asset-intensive with less than favorable margins, selling to a non-strategic buyer may be your only suitable option. These buyers are often seen as the buyer of last resort because they usually pay the lowest price. Selling to a direct competitor carries an additional risk – a potential leak in confidentiality. When selling to a direct competitor, hire a professional to negotiate on your behalf, build value that can’t be replicated, carefully track the release of confidential information, and never act desperate. 
  3. Wealthy Individuals: Individuals commonly acquire businesses at the bottom end of the lower middle market, and sometimes larger businesses (i.e., Twitter), if they are Elon Musk. For example, a general partner of a private equity firm may branch off and acquire companies on their own behalf, or a corporate executive may raise money from investors to acquire a business in their industry. Because these buyers are concentrating their investment in one business, they often stick to less risky investments and prefer to buy a business with a proven track record. When selling your business to an individual, focus on minimizing the perception of risk.

Now that you understand the three types of buyers, here’s a more detailed explanation of each type.

Financial Buyers

Financial buyers primarily consist of private equity, or PE firms, for short. Private equity groups are the most common buyers of mid-sized companies in many industries. There are approximately 8,000 professional PE firms worldwide. Apart from PE firms, there are also family investment offices and other types of investors that function similarly to PE firms.

Private equity groups raise money from institutional investors, which are called their limited partners, and then invest those funds into private companies on behalf of their investors. Most are structured as a limited partnership, with the PE firm serving as the general partner and the institutional investors serving as the limited partners. PE firms usually operate multiple funds simultaneously with each fund having a lifespan of 10 years and two 1-year extensions. The PE firm normally has a holding period of three to seven years for each business in which they invest. The PE firm makes a profit either from distributions it pays itself out of the company’s earnings, paying down the debt used to acquire the business, or from selling the company at a higher price than it paid.


Financial buyers value a business based solely on its numbers without considering the impact of any synergies. If the financial buyer owns a similar company in their portfolio, then they can be considered a strategic, corporate buyer. PE firms focus on the return on investment, technically called the internal rate of return (IRR), as opposed to any strategic benefits of the acquisition. Most PE firms target an IRR of 20% to 30% per year. This means they must generate a return on invested capital of two to three times the initial investment when they exit the investment or re-sell it in three to seven years. IRR is heavily dependent on the holding period, or the amount of time they hold the investment, which is why they try to turn around their investments as quickly as possible. The shorter the holding period, the higher their IRR. A strong management team must be in place to do this, which is why nearly every PE firm requires the existing team to remain to operate the business after they acquire it.

PE firms purchase a company as a stand-alone entity. The changes they make to the business post-closing are designed to improve profitability and make the company more attractive to a future acquirer. They’re always building the company up to turn it around and sell it in the shortest time possible. As a result, financial buyers analyze a company’s cash flow on a stand-alone basis, without taking into account any synergistic benefits, with the objective of enhancing the capacity to increase earnings and the value of the business over the next three to seven years. The only exception is PE firms that own a company in their portfolio that may achieve strategic benefits as a result of the acquisition. 

PE firms are experts at scaling companies through creating strategic relationships, building strong management teams, and developing efficient sales and marketing programs. The goal for many PE firms is to sell the business to a strategic buyer at a much higher price than they paid for it. They achieve returns through two objectives – increasing the EBITDA of the business they acquired and increasing the multiple through something called “multiple expansion.” Multiple expansion is when the multiple increases as EBITDA increases. For example, a company with a $2 million EBITDA might fetch a 5.o multiple, whereas a company with a $5 million EBITDA might receive a 7.0 multiple. If they manage to increase EBITDA by 150% to $5 million from $2 million, they will have increased the value of the business by 250% due to multiple expansion.

Financial buyers analyze a company’s cash flow on a stand-alone basis, without taking into account any synergistic benefits, with the objective of enhancing the capacity to increase earnings and the value of the business over the next three to seven years. 

In order to scale companies, PE firms use something called “the private equity toolkit,” which consists of the following:

  • Strategic Plan: The PE firm creates a limited number of initiatives that are then broken down and assigned to one manager per initiative to ensure accountability. They then monitor the performance of the plan through a regular cadence of monthly check-ins and quarterly board meetings.
  • Budget: They also create a bottom-up budget with the team, then break the budget down into responsibilities and assign them to key executives.
  • Governance: Their strategy also involves pushing decision-making down the organization by creating a chart of restrictions. Giving the existing team more authority allows the team to make decisions and take ownership of the strategic plan while facilitating proper governance of the business. PE firms may also hire a COO to focus on day-to-day operations so the CEO can focus more on strategic goals. To hold the team accountable and monitor performance, the PE firm may conduct weekly meetings with the CEO and CFO. Monthly check-ins and quarterly board meetings with the senior management of their portfolio companies ensure progress is being made toward the strategic plan.
  • Compensation Plan: A management compensation plan may also be created that’s tied to the budget and weighted based on the company’s objectives, such as productivity, efficiency, and profitability. An example for a VP of operations in a mid-market company might consist of a base salary of $200k, a bonus program of $100k, and a stretch goal worth an additional $100k. This motivates the key executives to stretch toward a profitable exit in three to five years. Cash bonuses are focused on short-term goals, and equity bonuses are focused on long-term goals. They use both types of incentives to drive short-and long-term growth. Typically, 10% to 20% of the equity is also allocated to the management team to ensure alignment with the long-term goals of the company.
  • Sales Team (Organic Growth): Many mid-market companies lack a strong sales team. Quick changes can often be made to the business that can dramatically improve profitability, such as building an internal sales team. PE firms build up the sales team by poaching successful salespeople from competitors or building them from the inside, and installing systems and processes to enable a high-performing sales team.
  • Acquisitions (Inorganic Growth): Organic growth is always preferred over acquisitions, but acquisitions are useful in certain industries as another potent tool. PE firms can add a tremendous amount of value by scaling companies through acquisitions because they have both the experience and capital to do so. An acquaintance of mine in the PE world recently acquired an HVAC company generating approximately $10 million in revenue that they scaled to hundreds of millions in revenue in just a few years through an aggressive acquisition program.
  • IT Systems: PE firms upgrade systems and software in the business to prepare the business to scale quickly. It could cost a couple hundred thousand dollars to upgrade the IT systems for a mid-market company to bring them up to industry standards, but this investment dramatically improves scalability and governance. For example, robust accounting software enhances governance, which improves scalability. They usually prefer to stick to the best-of-breed software in the industry and will often hire an industry consultant to perform an assessment to determine the most suitable software to use. 

To execute the tools in their toolkit, PE firms need a strong management team. Unfortunately, this is an area where many PE firms are unwilling to compromise. While they’re often willing to implement the tools outlined above even if the previous owner hasn’t installed these systems, many aren’t willing to build a new management team from scratch. One of their major considerations is, therefore, the strength of the existing management team.

Price is an important consideration for financial buyers because the business is typically run as a stand-alone company post-closing unless they own a similar company in their portfolio. PE firms don’t usually plan to integrate a newly purchased company with another company post-closing unless they own a platform company in the industry. In that case, they can be thought of as a strategic buyer. As a result of the lack of synergies, PE firms are restricted as to the multiples they can pay, and these multiples are fairly easy to predict. The price they can afford to pay is heavily dependent on the cost of debt and their capital structure due to their use of leverage. As financing becomes cheaper and more available, the price PE firms may be willing to pay for a business can exceed that of strategic buyers.

A PE firm may also go on an acquisition frenzy, acquiring multiple small competitors and rolling them up into one large entity with the goal of consolidating the industry. This is known as a roll-up. PE firms begin a roll-up by purchasing a platform company, which is typically a company generating a minimum of $20 million in annual revenue. They’ll then complete a series of small, tuck-in acquisitions to round out the capabilities of the platform company by adding customers, technology, and other products to their lineup. Roll-ups are a great time to sell if this is occurring in your industry. With a roll-up, the goal of the PE firm is an ultimate sale of the rolled-up company at a significantly higher multiple than they paid for the individual tuck-ins that now comprise the rolled-up entity – a.k.a. multiple expansion.

Learn More

If you’d like to learn more about how private equity firms operate and think, I suggest listening to our M&A Talk podcast episode called The Private Equity Toolkit with Michael Roher. You can find it in the Resources section of our website at morganandwestfield.com. Michael is a senior partner at BlueArc Capital and has over 35 years of private equity experience. In the episode, we talk about the primary methods PE firms use to increase the value of companies they acquire. This will give you a deeper understanding of their objectives and the thought process they use to scale the companies they acquire to create value for their investors. 


PE firms use significant leverage (i.e., debt) when purchasing a company because the leverage increases their internal rate of return. If leverage, or bank debt, is used to acquire your business, your business must generate enough cash flow to cover the debt service. As a result, a PE firm can’t pay more for your business than your numbers dictate. Because PE firms use significant debt to acquire companies, this means they’re usually limited to acquiring companies that produce consistent cash flow, as opposed to high-growth, speculative companies that normally attract the interest of venture capital firms. The primary exception to this rule is growth equity, which is equity capital offered by private equity firms to companies to scale their operations. However, PE firms that offer growth equity seldom employ leverage in their capital structure. On the other hand, PE firms specializing in buyouts employ significant leverage in their capital structure and are therefore limited to acquiring companies that produce consistent cash flow to meet their lender’s requirements.

Private equity firms almost always prefer to retain both you and your existing management team. After all, private equity firms are financial buyers, not operational buyers, and will need someone to run the company post-closing. If you and your management team don’t stay to operate the business post-closing, the PE firm must bring in a team to operate it. This increases risk and lowers the value of your business, and few PE firms are willing to do this.

Tips for Dealing With Financial Buyers

The PE firm will usually incentivize you to stay involved by requiring you to retain at least a 20% interest in the business post-closing. Selling to a PE firm allows you to sell a portion of your company now, thereby diversifying your risk. You can then sell the remaining portion in the future, potentially achieving a second, larger exit in three to seven years when the PE firm re-sells the business. 

For example, you sell 80% of your shares now and retain 20% of the company post-closing. The remaining 20% equity may lead to a larger exit for you than the initial 80% sale. 

When dealing with financial buyers, I recommend the following:

  • Build a Strong Management Team: Financial buyers typically require the existing management team to remain to operate the business after the closing.
  • Increase EBITDA: This is the primary metric financial buyers use to value a business.
Understanding your competitors’ strategies and objectives enables you to take concrete steps to target buyers most likely to pay the maximum price for your company.

Corporate Buyers

Corporate buyers can be competitors, customers, or suppliers. These buyers may be looking to enter new markets or acquire proprietary products, technology, or access to customers. In some industries, corporate buyers may be the most common type of buyer. Corporate buyers have an entirely different set of objectives than PE firms and often pay a higher multiple than others if they can’t easily replicate what your company has to offer. 

Corporate buyers consist of two subcategories – strategic and non-strategic. Strategic buyers realize synergies from acquiring your company, whereas non-strategic buyers are usually direct competitors seeking to acquire your business as a low-cost alternative to organic growth.

Why Corporations Acquire

Most innovation occurs in small start-ups as they’re more agile and willing to take greater risks. Small businesses are naturally more innovative than big businesses. Larger companies acquire smaller companies because of that innovation and then leverage their own resources to bring that innovation into the mainstream. 

Examples include Uber and Lyft unseating much larger competitors in the $40 billion taxi industry, Airbnb making a significant dent in the $570 billion global hotel industry, and Amazon, which started out as a humble seller of books, now dominating the $870 billion e-commerce industry. 

Companies make acquisitions because it’s difficult, if not impossible, to predict winners in product launches, partnerships, strategic alliances, or other forms of corporate development. By completing many acquisitions, a company can increase its odds of success. To improve their chances of success, competitors establish corporate investment funds to acquire smaller competitors. Most larger companies have sizable, dedicated teams exclusively devoted to making acquisitions. Note that I said acquisitions, not “an acquisition.” Companies attempt to defy the odds by completing a series of acquisitions, as opposed to relying on a single acquisition.

Jeff Bezos famously told his employees, “One day, Amazon will fail.” To think that the founder and CEO of one of the largest companies in the world expects to fail highlights the dynamic changes that have taken place in business in the past generation. Large companies have high failure rates. They often have too many resources. Losses are huge when an innovation fails at a large company. By acquiring other companies, large businesses reduce their long-term chances of failure.

Corporate buyers can be competitors, customers, or suppliers. These buyers may be looking to enter new markets or acquire proprietary products, technology, or access to customers.

Strategies for Acquisition

Even though the reasons for making an acquisition may be similar from company to company, acquisition strategies vary significantly. Some companies, such as 3M, acquire hundreds of small companies at early stages, therefore lowering valuations. Other companies wait for significant customer validation before considering an acquisition and end up paying higher premiums. 

Acquisitions are one of many corporate development strategies for companies. Well-funded companies establish corporate development plans to supplement their strengths and mitigate their weaknesses. Corporate development plans include many strategies, such as:

  • Internal research and development 
  • New product development
  • Partnerships
  • Joint ventures
  • Licensing
  • Strategic alliances
  • Mergers and acquisitions
  • Divestitures and carve-outs to offload unprofitable business segments

In business, where there are no guarantees of success, a corporate development plan is designed to maximize a company’s possibility of long-term success. M&A is one of many strategies in a company’s corporate development plan. M&A is only one weapon used within corporate development, but the aim of corporate development is universal – to maximize company, and therefore shareholder, value. By understanding your competitors’ strategies and objectives, you can take concrete steps to target buyers most likely to pay the maximum price for your company.

Types of Corporate Buyers

Here are the different types of corporate buyers:

  • Direct Competitor, Different Geography: The business is in the same industry and may be looking to expand into your area. 
  • Direct Competitor, Same Geography: The business is in the same industry and same geographical area as your business. This is common in “zero-sum” industries where the industry is no longer gaining market share, or growing, and competitors are fiercely contending for market share, such as the airline industry. In these industries, it’s often more cost-effective to acquire a competitor than attempt to steal market share through advertising.
  • Indirect Competitor: In this instance, the buyer may be considering expanding into a new market or selling their products or services to your existing client base. For example, a food distributor may be interested in purchasing a food manufacturer or vice versa. Rather than build a business from scratch, they may be interested in simply acquiring your company. If you choose to approach a company you think may have this synergistic potential, be prepared to demonstrate the potential and competitive advantages of your business clearly and concisely.
  • Customers: Often, your best customers are your biggest fans. They promote your business within their circle because they like what you offer. They may make large purchases regularly, or they may have approached you about business deals, offers, or opportunities in the past. 
  • Suppliers: Businesses will commonly acquire other companies they’re already connected with in some fashion. Rather than outsourcing their product or service to you, it can be more profitable in the long run to bring your services under their corporate umbrella. Sometimes referred to as “vertical integration,” this type of acquisition can complete the value chain for a company expanding into new industries or areas.


Corporate buyers also consider the amount of time it may take to recreate your value proposition. If time is sensitive and the company must move quickly in the industry, it may make more sense for them to acquire your company due to the lost opportunity cost of building a business from scratch. For corporate buyers, it all boils down to the “buy vs. build” decision.

Unlike PE firms, corporate buyers often have no defined exit strategy and typically plan to fully integrate your company with theirs and hold it indefinitely. For this reason, they’re often willing to consider acquiring companies that many PE firms would take a pass on, especially if the acquisition produces a synergistic benefit for the company.

Some of the most common reasons corporate buyers purchase companies are to acquire a customer list, new product, or service capabilities, or to access a new market. In many cases, it makes more financial sense for a corporate buyer to grow through acquisitions than to grow by creating new products and services or by acquiring new customers. 

Non-organic growth happens most often in mature industries. Some examples include the cellular industry with T-Mobile’s acquisition of Sprint and MetroPCS, growth in media companies such as AT&T’s acquisition of Time Warner Cable or Walt Disney’s acquisition of Twenty-First Century Fox, and consumer products with Heinz’s acquisition of Kraft. These are examples of mature industry acquisitions in which organic growth has slowed, and the most suitable option for increasing revenues is to “buy growth” as opposed to “build growth.”

The corporate buyers’ decision always boils down to this classic “buy vs. build” paradigm – that is organic growth (sales) vs. inorganic growth (acquisitions). Companies in any industry either grow organically (build) or inorganically through acquisitions (buy). Corporate buyers make this decision based on which form of growth is less expensive and represents the least amount of risk. They will purchase a business because the company they’re looking to acquire offers them a benefit they can’t easily create on their own, or offers it faster than they can create on their own in fast-moving markets.

But the decision-making process is different for non-strategic buyers. The goal of non-strategic buyers is to acquire your company at a low enough price that doing so would be a more economical avenue of growth than pursuing growth organically. Their only way to do this is to drive the price down as far as possible. They are often seen as the buyer of last resort because they usually pay the lowest price. These buyers know your industry well and don’t want to pay for goodwill. The value of your company lies in what the buyer can’t easily recreate. For example, if you want $20 million for your business and the buyer could achieve the same level of revenue by investing $5 million into marketing, they’re unlikely to buy your company if it costs more than $5 million.

The following are several specific reasons a company may acquire your business:

  • Access to Customers: A major objective for acquisitions is access to key customers. Perhaps a company has made countless attempts to gain access to key customers in their industry, but those efforts have been in vain. An acquisition could be a guaranteed method of gaining those customers if the target already has existing relationships with them.
  • Access to Markets: Other companies acquire a business as a fast entryway into a different geographic or customer market segment, especially on an international level. For example, a software company in the restoration construction space could acquire a software company in the industrial construction sector. One of the objectives of the acquisition would be to gain quick access to the customer base and an immediate reputation and credibility in the industrial sector. Such a move could allow it to roll out its existing suite of products or services to the customer base of the company it purchased in the industrial segment. Without the acquisition, the company may have difficulty making the leap from one industry to another. The acquisition shortcuts the leap and mitigates the risk associated with doing so. For a real-life example, look no further than Coca-Cola, which in recent years has purchased its way into the sports drink, fruit juice, and water markets, just to name a few.
  • Access to Technology: With superior distribution networks, a large company can scale a solution out to the masses at a much faster pace than a smaller company with a limited marketing budget and sales team. By widening the acquirer’s product suite, the company provides a broader range of solutions to its customer base and will likely lower customer attrition and improve retention. But it isn’t just access to technology – rather, it’s access to technology that has been validated by the market. Companies look to the ultimate decision-maker – the customer – to determine the potential success of a product. 
The value of your company lies in what the buyer can’t easily recreate. 


Selling to a direct competitor carries a key risk – a potential leak in confidentiality. Approaching direct competitors can be dicey, and it’s possible word will get out. If it does, your competitors are likely to use this against you and may attempt to poach your customers or employees. This can further undermine the value of your company and may even kill a deal you’re currently negotiating. A breach of confidentiality is less likely and impactful when dealing with indirect competitors, and this is often the preferred route if you choose to hire an investment banker.

Otherwise, corporate buyers focus on the long-term fit with their company and synergies, as well as the ability to integrate your company with theirs. All corporate buyers will recreate whatever value you have to offer (i.e., build) if they can do so at a lower price than it would cost to acquire your company (i.e., buy). 

Unfortunately, corporate buyers play it close to the vest and don’t disclose the mechanics of their decision-making process, but it’s important to know that they’re carefully weighing their options behind the scenes. As noted above, if they can recreate what your business has to offer at a lower cost than what they would need to pay to acquire your company, then they will. Luckily, the reverse is also true – if they can’t recreate what your company has to offer, they may be willing to pay significantly more than other buyers. The value they can afford to pay is often significantly greater than the fair market value. This is called “strategic value” and is impossible to measure because these buyers don’t disclose the synergies they’ll receive as a result of the transaction, and, therefore, you can’t calculate the value they receive from the acquisition.

You won’t know how much a corporate buyer is willing to pay until you actually sell your company. That’s why it’s important to negotiate with as many buyers as possible to drive up the price. These buyers will neither disclose their specific reason for acquiring you, nor will they share their projections or other financial information with you. As a result, you won’t know exactly why they’re acquiring you or the synergies they’ll reap from the acquisition. Fortunately, you don’t need to know why they want to acquire you if your strategy involves conducting a private auction and negotiating with multiple buyers to drive up the price. A private auction is the only way to uncover the maximum price buyers are willing to pay. 

If you’ve ever been to an auction, you know what I mean. In a typical auction, buyers bid against one another until the final stages, in which a handful of bidders are left bidding against one another. In the last lap of the auction, two buyers may be left as they desperately try to one-up the other bidder. And finally, one buyer unfolds their cards and makes their final move by offering a dramatically higher price in an attempt to deter the one remaining buyer. In some cases, several more rounds may ensue. Other times, the other buyer may simply cede to the last standing bidder. 

In most auctions, the price is too high for all buyers but one. But for that last buyer, the price is worth it. That’s the goal of an auction and why many threaten to withdraw their offer if you even mention the word “auction.” Such a ploy is no different than showing up to an auction and threatening to bow out if any other bidders show up. 

In the M&A world, a private auction is conducted similarly, albeit privately. An investment banker will carefully negotiate with multiple interested parties through several rounds of negotiations to unveil the maximum amount one buyer is willing to pay to acquire your company. If you own a company that could be sold to a corporate buyer, the only way to know you’ve maximized the price is to conduct a private auction. Establishing the value of your company isn’t based on a democratic vote. You won’t poll all the buyers in the industry and average their responses to determine what your company’s worth. Rather, the price you receive is the maximum price one buyer is willing to pay. 

Many corporate buyers will approach you out of the blue and submit an attractive offer to acquire your company. This buyer has one goal – to avoid competing against other buyers. If they convince you to do this, you’ve just become your own worst enemy and trapped yourself in a corner. Unless you want to conduct an auction with just one buyer, I recommend against this. On the other hand, a carefully orchestrated competitive environment will boost the price. If your business will be sold to a corporate buyer, this is the only way to ensure you’ve maximized your price.

Tips for Dealing With Corporate Buyers

When dealing with corporate buyers, whether strategic or non-strategic, I recommend focusing on the following areas:

  • Value Proposition: Focus on building a company whose value is difficult to replicate. If the buyer can easily replicate what your company has to offer, they’re unlikely to offer top price.
  • Realistic Assessment: Be realistic in determining if your company is a suitable investment for a corporate buyer. Consider retaining a middle-market M&A advisor to perform an unbiased assessment of your business to determine if a synergistic buyer may be a likely candidate for your business. 
  • Private Auction: Hire an M&A intermediary to conduct a private auction. These buyers don’t offer to pay top value unless they’re aware that other buyers are also competing to acquire your company.
  • Hire a Professional: Having a professional negotiate on your behalf can help your bottom line. These buyers will often initially offer a low price and will only increase their bid if they believe they are competing with others to purchase your company. 
  • Build Value: Build value in your company that can’t be easily copied. This includes intellectual property, such as patents, trademarks, trade secrets, a recognized brand name, and long-term customer contracts, to name a few.
  • Stay Calm: Never show any signs of desperation. If you do, this will be used against you throughout the negotiations.

Individual Buyers

High-net-worth individuals comprise the minority of buyers of most middle-market businesses. However, if your company is valued at less than $10 million, it’s likely a meaningful percentage of your target audience will, in fact, be high-net-worth individuals. 

Many of these buyers are referred to as “independent sponsors” or “fundless sponsors.” Whatever we call them, their numbers are significant. Globally, there are currently over 14 million high-net-worth individuals with financial assets valued at more than $1 million, and over 225,000 ultra-high-net-worth individuals with financial assets valued at more than $30 million.

Independent sponsors operate similarly to private equity firms, but they haven’t yet raised capital from investors. Many are C-level executives looking to break into an industry as entrepreneurs and may have casual commitments from investors they know. The major risk with independent sponsors is that they make an offer on your business that you accept, but then they can’t obtain the capital to complete the acquisition. 

For companies valued at less than $10 million in which the business is unlikely to appeal to a PE firm or corporate buyer, selling to an independent sponsor may make sense. Many businesses may have flaws that deter most PE firms and corporate buyers, such as a lack of a strong management team or high customer concentration. These businesses often appeal to independent sponsors because they don’t have to compete against a private equity firm or corporate buyer. If this describes your business, an independent sponsor may be your ideal buyer.

For individuals, the perception of risk kills more deals than the absence of opportunity.


Individual buyers are looking to purchase an income stream. That’s usually their number-one goal. Because acquiring your business creates no synergies for them, they’re limited to valuing your business based on the income it produces. If they happen to own another similar business, they can be classified as either a corporate or industry buyer. Otherwise, they’re restricted to valuing your business based on the income it generates. Unlike PE firms, individual buyers are willing to consider a less-than-pristine business. For example, even if your business lacks a strong management team, many individuals will consider acquiring it. This is good news for anyone who owns a business that possesses certain characteristics that may deter other groups of buyers.

A large company that I’m representing in the New England region has three active owners involved in the business. Most professional buyers are passing on the opportunity because of the concentration of management responsibilities among the three owners. However, we’re inundated with independent sponsors who are interested. If you own a business on the smaller end of the lower middle market, expect to deal with quite a few individuals, the majority of whom will be independent sponsors. In some cases, this may comprise the majority of your target market.

These buyers use the parlance of Hollywood – that is, “show me the money, baby.” For these individuals, it’s all about income and minimizing the perception of risk. While opportunity or untapped potential will be attractive to them, it won’t motivate them to the degree that certain risks will de-motivate them. These buyers scan businesses they’re interested in acquiring, looking for areas that represent significant risks. Because an individual is concentrating their investment in one company, they can’t afford to take risks. The factors that present risk to these buyers vary from business to business and are somewhat a matter of perspective. The advice of an experienced M&A advisor will be valuable in identifying risky areas of your business that need to be mitigated before you go to market if you think this will be your primary audience of buyers.


For these individuals, the process of buying a business can be more emotional than for other buyers. That’s because buying a business is a risky proposition that often requires parting with a substantial portion of their net worth. For this reason, individuals often stick to less risky investments and prefer to acquire companies with proven track records. Most stick to industries with which they’re familiar. Individual buyers finance the purchase of a business primarily through a combination of their own cash, cash from investors, seller financing, and bank financing. Most individuals acquire businesses valued at less than $10 million in transaction size. 

Tips for Dealing With Individuals

When dealing with individual buyers, I recommend minimizing the perception of risk in your business. For individuals, the perception of risk kills more deals than the absence of opportunity. While risk and opportunity are two sides of the same coin, these buyers don’t always see it that way. Individuals have a skewed perspective toward loss aversion. Loss aversion is the tendency to prefer avoiding losses over acquiring equivalent gains. Some studies suggest that losses are twice as powerful psychologically as gains. Loss aversion implies that a loss of $100,000 packs a bigger psychological wallop than a gain of $100,000.

Individual investors are extremely averse to loss because they are investing their own money and are concentrating their risk in one acquisition. To counter this strong bias toward loss aversion, you should retain an M&A advisor to objectively analyze your business and identify ways to make it more attractive to these types of buyers through minimizing the perception of key areas of risk in your business. When I perform an assessment for a client, for example, I analyze the company as a potential investor would. I prepare a report that contains a determination of the business’s marketability, an analysis of the risks and opportunities, potential deal killers, methods of reducing risk, and a list of steps the owner can take to minimize risk in the business and maximize its value. I recommend you do the same.

Key Points

  • When selling your business, keep in mind the type of buyer most likely to buy your business. 
  • Determine if you’re most likely to be approached by an individual, corporate, or financial buyer, and market your business accordingly, based on its size and individual advantages. 
  • Knowing who your buyer is likely to be will help you determine the steps you need to take to prepare your business for sale, as well as determine the best marketing strategy and overall sales approach to maximize your company’s value.