The 5 Types of Buyers for Your Business

At ListBizForSale, about 75% of buyers who purchase businesses are individuals.

Most of these buyers can be categorized as:

• •People from the corporate world looking to own their own business
• •High-net-worth individuals (HNWI), those with assets greater than $1 million
• •Individuals who've sold a business in the past and would like to purchase another company

Individual buyers are interested in buying a company they can feel comfortable with succeeding in, which means they place value on existing infrastructure, such as quality employees, written systems and processes, and training from the owner.

Most lenders won't lend on businesses worth less than $5 million in purchase price because they have so much Goodwill.

The Small Business Administration (SBA) created the 7(a) loan program to encourage investment in small businesses and many individual buyers will use lenders backed by the SBA to purchase a company.

While the SBA 7(a) loan program is helpful, the total Project Cost of a business cannot exceed $5 million. If your earnings are above $1.5 million, you likely won't sell to an individual buyer.

But if your business is worth less than $5 million, and you value seeing your company continue to exist with new ownership while achieving a premium sale price, an individual buyer is probably your best candidate.

A strategic buyer is a business that desires to grow by acquiring other companies.

Often, these buyers are competitors within your industry, but they could also be suppliers, vendors, or unrelated businesses.

Strategics buy businesses to recognize synergies between their existing company and yours by reducing costs or increasing revenues.

Since they can see unique synergies in a potential investment of your company that other buyers can't, a Strategic might be able to afford to pay you a higher premium for your business.

When going through the sale process with a Strategic, be prepared for an arduous due diligence process. Strategic buyers often have their CFOs perform lengthy diligence or hire third-party accounting firms to perform a Quality of Earnings analysis.

A Strategic buyer may offer for you to maintain an equity stake in your company (such as 30%), especially if you express interest in staying on to help with growth initiatives.

If you value receiving the highest price on the sale of your business and have a management team in place or are willing to stay on and grow the company, selling to a Strategic buyer can be an excellent choice.

Private Equity Groups (PEGs) are investment vehicles run by acquisitions professionals. They raise private equity funds from other investors to get money to purchase businesses and typically plan to sell them in 5–7 years.

PEGs typically focus on a few key industries and identify investments in a specific earnings range (ex: $1 million – $15 million in earnings).

When a Private Equity Group looks to acquire your business, they will look at it either as a "Platform" or "Add-On" acquisition. A Platform investment is when the prospective buyer sees your company independent of their portfolio, while an Add-On (also known as a Bolt-On) looks at your company for the potential benefits it can bring to one of their existing Platform companies.

As with any buyer you bring on as an equity partner, make sure your personality meshes with the operating group that will be overseeing the acquisition. You'll likely be interacting with the group for several years.

The downsides (or upsides) of selling to a Private Equity Group are their short time horizon, lengthy due diligence, and their long-term oversight of your business.

If you want to take a significant amount of money off the table today, grow your company to the next level with a professional team, and want a lucrative payout when the business sells again in the future, then selling to private equity is your best option.

A Family Office is a private wealth management advisory firm that serves ultra-high-net-worth investors. Unlike traditional wealth management firms, family offices offer a total outsourced solution to managing the financial and investment side of an affluent individual or family.

Family offices typically invest in a wide range of asset classes, including private equity, real estate, hedge funds, and direct business acquisitions.

When a family office acquires a business, they often take a long-term view, sometimes holding companies indefinitely rather than targeting a specific exit timeline like a traditional private equity group.

Family offices can be attractive buyers because they tend to be less bureaucratic than institutional investors and can move quickly when they find the right opportunity. They also often allow existing management teams to remain in place.

If you're looking for a buyer who will preserve your company's legacy and culture while providing the capital needed for growth, a family office can be an excellent fit.

An Employee Stock Ownership Plan (ESOP) is a type of employee benefit plan that gives workers ownership interest in the company in the form of shares of stock.

ESOPs are often used as a business succession strategy, allowing business owners to gradually transfer ownership to their employees over time.

One of the key advantages of an ESOP is the potential tax benefits. In many cases, the sale of a business to an ESOP can be structured to defer or eliminate capital gains taxes for the selling owner.

ESOPs can also be a great way to reward loyal employees and preserve the culture and values of your company. Employees who have an ownership stake in the business tend to be more motivated and productive.

However, ESOPs can be complex and expensive to set up and administer. They require ongoing compliance with ERISA regulations and annual valuations of the company's stock.

If you value employee ownership, want to preserve your company's culture, and are looking for a tax-advantaged exit strategy, an ESOP may be worth exploring with a qualified advisor.