How Long do Buyers of Businesses Stay in the Market?

Executive Summary

How long does a buyer keep looking for a business before they decide to either pull the trigger or give up their search — or, to use a technical phrase, “fish or cut bait”?

There are two general types of buyers looking to buy a business: companies and individuals.

Companies: Once a company decides to grow through acquisitions, as opposed to growing organically, they generally stay in the market indefinitely or until they change their strategy. Companies are less likely than individuals to be kicking tires. Financial buyers continually buy companies as part of their fund-management process, but this varies based on the age and make-up of their funds. Most private equity groups have multiple funds in different stages of their lifecycle and are therefore constantly searching for acquisitions.

Individuals: The amount of time that individual buyers stay in the market varies widely based on several factors. Some individual buyers remain in the market for years.

What affects how long an individual stays in the market? Is there a difference between first-time buyers and previous business owners? How long is too long to be looking? How can you assess a buyer’s motivation level? How do you avoid tire-kickers?

If you are selling your business, recognizing these different types of buyers — including their motivations and perspectives — will help you understand the reasons behind their behaviors. This knowledge can help you assess if a buyer is serious and likely to make a move or if they are merely fishing.

Want to know more? Keep reading.

Companies

Let’s first address companies.

Companies Growing Through Acquisitions

Once a company decides to grow through acquisitions, as opposed to growing organically, they generally stay in the market indefinitely, or until they change their strategy. Companies are less likely than individuals to be kicking tires.

Financial Buyers

Private equity groups (PEGs) and other financial buyers continually buy companies as part of their fund-management process, but this varies based on the current age of their fund. Most private equity groups have multiple funds in different stages of their lifecycle and are therefore constantly searching for acquisitions.

Individuals

Now, on to individual buyers.

The time span that individual buyers stay in the market varies widely based on several factors. Many business owners are often unaware of just how long individuals stay in the market looking for a business. Some individual buyers remain in the market for years.

Let’s examine the factors involved.

Motivation Level

Buyers’ motivations vary. Some are highly motivated, set a goal, and buy a business as quickly as possible. Other buyers impulsively decide they want to buy a business after a bad day at work and change their minds the next week. These buyers enter and exit the market frequently.

First-Time Buyers vs. Previous Business Owners

Buyers who have previously owned a business are accustomed to making decisions with less than perfect information. They are more likely to make an offer on a business than a buyer who has not owned a business before. Previous owners are also aware that there is no perfect business — after all, they wouldn’t have sold their own business if it had been “perfect.”

Employees, on the other hand, often don’t understand what it means to be a business owner. They may not be accustomed to making decisions based on limited information or a gut feeling. Additionally, by definition — and because they are currently employees — these potential buyers are more risk-averse. They are less likely to make an offer on a business than a buyer who has previously owned a business.

The Lure of the American Dream

Everyone wants to own a business. Ask the average American on the street what their dream is, and most will say their dream is to become an entrepreneur. American culture celebrates self-made entrepreneurs, praising them in newspapers, magazine articles, movies, social media, and online.

Elon Musk, Bill Gates, Mark Zuckerberg, Richard Branson, Larry Page, Henry Ford, Thomas Edison, Andrew Carnegie, Jeff Bezos, Sam Walton — nearly every American can name the companies these people created.

Douglas McMillon, Rex Tillerson, John Hammergren, Stephen Hemsley, Larry Merlo, Mary Barra — do you recognize any names on this list? It’s unlikely. They have each been a CEO of a Fortune 50 company, yet few Americans have heard of them. Why? Entrepreneurs are idolized, while CEOs are often disregarded.

The American Dream is to own a business, not land the perfect dream job. As a result, a lot of people are looking to buy a business. Unfortunately, the majority will never pull the trigger — that’s why it’s called the American “Dream” and not the American “Reality.” We estimate that less than 5% of individuals looking to buy a business will ever buy a business.

Finances

Many buyers are unrealistic regarding how much cash is required to buy a business, and most are undercapitalized. As a result, buyers often stay in the market for a long time because they don’t have enough liquid cash to buy a business. These undercapitalized buyers may make offers on businesses that are contingent on bank financing, though most of these deals are turned down by the banks, often months later.

Deals Gone Wrong

Then, there are situations when a deal goes wrong. A buyer makes an offer on a business, and a seller accepts. The buyer then invests several months of time negotiating the deal and performing due diligence only for the transaction to fall apart for any number of reasons. Many of these buyers will re-enter the market later.

Beware of Buyers Who Have Been Looking Too Long

Beware of buyers who stay in the market for too long. Buyers generally stay in the market too long for one of two reasons:

• The search for the perfect business: Many buyers are searching for a business without flaws. Obviously, no such business exists. If it did, it wouldn’t be for sale, or a friend or competitor would quickly purchase it.
• Adversity to risk: Many buyers are scared to take the leap. Buying a business requires confronting one’s fears. At some point, the trigger must be pulled. Unfortunately, the prospect of cutting a check for millions of dollars is a proposition that’s just too scary for many first-time buyers.

Many buyers undertake a New Year’s resolution to buy a business. We met one individual whose goal was to buy a business by the end of the year. At the beginning of the year, he created an email address similar to [email protected]. Unfortunately, he had to change his email address three times because it took him three years to buy a business.

Practical Applications

Motivation

Once you understand the type of buyer you are dealing with — their behaviors and expectations — it’s time to dig deeper. Just as the buyer will perform due diligence on you and your business, it is paramount that you perform due diligence on the buyer. Part of your initial due diligence should be to assess the buyer’s motivations.

How motivated do they appear to be? Do they quickly return your calls and emails? Are they eager to move forward, or do they appear to be overly critical of your business?

We see many buyers who are overly critical, often bordering on being cynical, which may make them feel intellectually superior to you. They may take pride in criticizing your business. They can be critical because they do not have serious intentions of buying a business.

Have you ever taken a car for a test drive, gone to an open house, or gone “window shopping” for an expensive item that was for sale, knowing you had no intentions of buying it? If so, you likely came across as either disengaged, overly critical, or cynical to the salesperson. You may have critiqued the quality of the ride on the test drive, or commented on how the spare bedroom was not big enough. You probably didn’t exhibit genuine signs of interest. People looking to buy a business give off equally clear signals of their intent.

What is the most accurate way to assess a buyer’s motivation level? A motivated buyer will eagerly jump through hoops. They will quickly return phone calls and emails. Despite any potential roadblocks, they will appear eager to move forward. You don’t have to chase motivated buyers down — instead, they chase you down.

In 1964, Justice Potter Stewart was asked to define hard-core pornography, and he responded: “I shall not today attempt further to define the kinds of material I understand to be embraced… but I know it when I see it …”

Our response is the same when attempting to identify a motivated buyer. We know one when we see one. If in doubt, it’s unlikely they are truly serious about buying a business.

First-Time Buyers vs. Previous Business Owners

First-time buyers are great buyers — if and when they decide to pull the trigger. Assessing their tolerance for risk, on the other hand, is difficult. Weak motivation is easily overwhelmed by one’s fears. And buying any business requires some degree of risk, and therefore confronting one’s fears directly. A buyer will only buy a business if they conquer their fears.

Previous Business Owners

If a buyer has already been a business owner, and pursued and lived the American Dream, their motivation is more clear. If they have already owned a business, their expectations tend to be much more realistic than someone who has not.

Finances

Assessing a buyer’s financial capabilities is simple.

Ask them two simple questions:

1. How much liquid cash do you have?
2. What is your net worth?

Timeframes

Buyers should be able to identify a business and make an offer within six to 12 months. They should be able to close on a business within a year of starting the process. If the buyer has been in the market for longer than that, there could be problems.

Occasionally, we see buyers who have been in the market for one to two years. We almost always dismiss a buyer if they have been looking for more than two years. One to two years is a coin flip.

Keep in mind that how long a buyer is in the market is very different from the amount of time your business may be on the market. How long it takes to sell your business is a very different question. This discussion has centered on the factors that may influence how long a buyer is in the market looking for the right business. The more you understand about the potential buyers for your business, the more successful you will be in selling your business.