Who are the different types of business buyers, and what motivates a business purchase? This is a key question as it is important to understand your target market when selling your company.
Occasionally, businesses are passed on to family and heirs and that’s great if that opportunity exists but more often than not, other types of buyers are sought.
Employee and management buyouts are often vehicles for an exit strategy that may be considered by some business owners. This allows for forward planning and is often a satisfactory outcome for entrepreneurs as well as their staff.
Private buyers can range from first time buyers and sole traders, to private individual investors looking to expand their portfolios. A first time buyer will generally look to purchase a business they can operate hands on whilst an experienced investor will more likely look for a fully managed turnkey operation which they can grow and eventually sell. These types of buyers will largely be motivated to acquire small profitable businesses, or businesses that have the potential to become profitable.
I have found that recently there are more and more enquiries from foreign private investors looking for turnkey businesses to buy equity shares in, which enables them to reside in the UK. Specialist agencies have been set up to find businesses for these types of investors and I have one deal completing shortly involving a niche recruitment company based in the South of England. We have recently been contacted by a few of such agencies that attract investment from China, India, and The Far and Middle East, as well as Russia.
Private Equity Groups invest capital from high worth individuals and institutions, acquiring equity ownership in companies and seeking return of their investment over a period of time. They can have a very specialised or varied portfolio and look for anything from a 3 to 7 year strategic plan.
Selling to another company is usually the best and most profitable option in most cases and these can either be “mergers” or “acquisitions”. A merger is usually when your company becomes part of the acquirer’s company. It is usually a meeting of equals or of a slightly larger company and you may together become a new company. An acquisition is usually where you sell most of or all of your company to a larger organisation and become part of a parent company or a subsidiary.
There are 2 types of acquirers:
A strategic buyer - this is usually a competitor looking for companies where it can add value to its own products and services.
A complimentary buyer - this is a company that sells products and services that compliment and enhance those you sell.
There are 5 main types of merger and acquisition activity:
Vertical: These may be suppliers or customers.
Horizontal: These are mainly competitors.
Product extension: These are companies that offer complimentary products.
Market extension: These are companies from complimentary markets.
Conglomerate: This covers all other types of activity; a pure conglomerate activity would be where there is nothing in common and a mixed conglomerate, where there may be some type of market or product extension.
The purpose of a merger or an acquisition is, ultimately, to protect or improve the strength and/or profitability of the Acquirer and to maximise shareholder wealth. To achieve this, merger and acquisition motives include:
Diversification of products and services and this creates cross selling and maybe higher pricing.
Synergistic benefits such as economies of scale where for example there is a reduction in duplicated overheads.
Technological reasons including specialist software or personnel.
Increase in competitiveness and strengthen market position and market share.
Geographical diversification and international mergers and acquisitions are common.
Alleviation of seasonality issues.
Enhancement of suppliers and customer/client base.
Leverage into distribution/ supply chain.
Adding key, specialist personnel, management skills and workforce. This can also increase core competencies and resources.
Adding value to an acquirer and expedite their exit strategy by external growth (by contrast, organic growth can be achieved with an increase in sales by making internal investments).
A company’s ability to obtain finance; high financial leverage organisations may have difficulty obtaining funds, so it may merge with a company with a healthy liquid position with low or non-existent debt.
Providing tax advantages for an acquirer.
When selling your business, it is important to understand where your target market is and where an organisation can benefit from acquiring your company. Often a business can attract different buyers for different reasons, but an awareness of where the most value lies is key.
The next step is to prepare a carefully thought out and strategic marketing plan for selling your company.
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