The 4 Types of Buyers

There are four broad categories of buyers of businesses:

  1. Individual Buyers: These are buyers who tend to buy small businesses. Individual buyers have two primary goals – income and freedom. Their primary concerns are how risky the business is and whether financing can be obtained to purchase it. For these buyers, the process of purchasing a business can be quite emotional. For this reason, 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, I recommend minimizing the perception of risk and avoid overwhelming them with information.
  2. Financial Buyers: These buyers tend to buy small and mid-sized businesses. 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. Financial buyers have two principal goals – generating a high return and achieving a successful exit. Their key considerations when evaluating the attractiveness of a business are the profitability, stability, and growth potential of the business and retaining the existing management team. When selling to a financial buyer, you should focus on building a strong management team and increasing EBITDA. 
  3. Strategic Buyers: These are buyers who tend to buy small and medium-sized businesses. Strategic or synergistic buyers are considered to be the holy grail of buyers and may pay a higher multiple than others if they can’t easily replicate what you have to offer. Strategic buyers have longer holding periods than financial buyers and often have no defined exit plan. Most strategic, or synergistic, buyers look at the synergies your business has when they intend to fully integrate your company with theirs, so they 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.
  4. Industry Buyers: These buyers tend to merge with or acquire direct competitors. If your business is asset-intensive with less-than-favorable margins, selling to an industry buyer may be the only suitable option. In some industries, selling to a financial or strategic buyer may not be an option. Industry buyers are often seen as the buyer of last resort because they usually pay the lowest price. These buyers know the industry well and may not be willing to pay for goodwill. Selling to industry buyers carries an additional risk – a potential leak in confidentiality. When selling to an industry buyer, 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. 
Know your audience.