Individual Buyers

High-net-worth individuals comprise a minority of the buyers of middle-market businesses, whereas corporate buyers purchase the majority of middle-market businesses. On the other hand, individuals are the primary buyers of small businesses.

Here are some statistics regarding the number of high-net-worth individuals in the world:

• There are over 14 million high-net-worth individuals with financial assets valued at more than $1 million.
• There are over 225,000 ultra-high-net-worth individuals with financial assets valued at more than $30 million. 

Goals

Income

Individuals are almost always looking to purchase an income stream. They may have recently resigned from their job or they may be unhappy in their career and want to pursue the American Dream. Many are also former entrepreneurs but their goal is the same – generate personal income.

Freedom

Studies show that people start or buy small businesses primarily so they can control their own destinies and achieve freedom. Surprisingly, the goal of getting rich falls lower on the list of reasons these individuals want to buy a business. While an individual’s primary objective for purchasing a business is income substitution, they often value freedom and the ability to control their own destinies more than getting rich.

Considerations

Risk 

For these buyers, the process of buying a business can be quite emotional. That’s because buying a business is a risky proposition that often requires parting with a substantial portion of their net worth. They may have never previously owned a business, which can make the decision even more difficult for them. 

For this reason, they often stick to less risky investments and prefer to buy businesses with proven track records. Most stick to industries with which they are familiar; however, some buyers may consider purchasing a business in an unfamiliar industry if the business can be quickly learned or if the seller is willing to stay on after the closing for an extended period to ensure a smooth transition. 

Some individuals may be former small business owners. If so, these buyers are more likely to pull the trigger than a buyer who has never owned a business because they are familiar with risks inherent in a business – especially if they have owned a business in the same or a similar industry.

Financing

Individual buyers finance the purchase of a business primarily through a combination of their own cash, seller financing, bank financing, SBA financing, or the use of their retirement funds. Most individuals acquire businesses valued at less than $10 million in transaction size. 

Tips for Dealing With Individuals

When dealing with an individual buyer, I recommend the following:

• Minimize Risk: You want to minimize any risk associated with your business. For individuals, the perception of risk kills more deals than the absence of opportunity. Retain a business broker or M&A advisor to objectively analyze your business and identify ways to make your business more attractive to these types of buyers. When I perform an assessment for a client, for example, I analyze the business 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. 
• Avoid Information Overload: Don’t overwhelm the buyer with information, especially early in the process. Many individuals are nervous about making the leap into buying their own business – sending them more information or arranging too many meetings will only overwhelm them if they aren’t ready. Most serious buyers should be prepared to make an offer after the second or third meeting. If they don’t, move on.

When selling to a financial buyer, focus on building a strong management team and increasing EBITDA.