Monday, March 7, 2011

Types of Buyers: Who should you be targeting when you sell your business?

Buyer #1 is new to the industry and is willing to pay a premium for a company with stand-alone strength. They want the owner to be able to manage at an arms’ length from daily operations. This Buyer is not an expert but feels there is an opportunity in your business model so is primarily buying for the ROI.

You might want to consider how many buyers there could be that fit this profile, who feel your company provides the best, safest, and most reliable market rate of return. A LOT of time will be spent convincing this kind of buyer about risks and "how to" and education etc. The hand holding will consume a lot of energy and resources for a year or more.

The other challenge is when buyer does not know how a market sector/company works, they apply risk discount. They reflect that in how much cash on close verses vendor carry. The higher the perceived risk the higher the vendor carry will be.

Buyer # 2 is involved in a related or competitive industry now and is looking to buy market share. When Precision Drilling bought Kenting, Hank Swartout said he did not buy 100 more rigs... he bought 30% of the marketplace over night. That was worth top dollar to him. This Buyer has access to replace whatever skill sets necessary; the existing owners are able to stay for their work agreement and the buyer is able to replace their positions when the timeframe of their agreement is up.

This Buyer does not have to be trained on the ROI opportunities or educated in potential risks and upside because he is already aware of them. He is buying based on strategic advantages and possible higher rates of return.

Buyer #3 is someone or a group of people that is/are interested in having their own shop. Perhaps they tried to buy the shop they worked for but it was too big for a buyout, or the owner was too young (and not interested in selling), etc. These buyers have skills and a strong desire to make things work.

They will maximize how they use you and your partner for first few months, but they will move you out as soon as possible as they will want to do things their way.
This buyer requires the least amount of education and is looking for encouragement to take the risks. They will have desire to manage risk but charge forward.

Buyer # 4 is from the USA or Europe and is looking for a solid foot hold into the Canadian marketplace. They are going to keep everything status quo, except they will put in leaders from their existing operation somewhere in the world. It barely matters to them what the system is inside your group as they are going to change the model to fit with their other operations. They will spend top dollar to keep you and your partner around a long time as insurance of continued momentum. The only education required is the peculiar aspects of some of the Canadian work. This buyer already knows much about the marketplace.

This leads me to the question: If you do not know what a potential buyer is looking for your specific opportunity right now, why invest the next 3 years in preparing for buyer # 1 when the market place might have hungry #2, #3, and #4s determined to do a deal?

There are always buyers who feel they are smarter than sellers and looking for the right deal. With the average transaction taking a year from when you start, why would you not make progress on every strategy concurrently and cherry pick the deal that works best for you? The time to pursue one or two strategies at a time is MUCH longer than strategically testing the market for opportunities, while you're reinforcing your team and options.