Will Someone in Pittsburgh Buy My Business?
The statistics are daunting.
So, there are 15 times more buyers than sellers and only 20% of businesses listed ever sell? The primary issues we see are:
- Prices that have no correlation to value, Owner priced it him/herself based on what they would like to get or what they need to live on the rest of their life
- Buyers that are not serious, unwilling to take any risk unless getting a perfect deal
- Critical information on business (like one customer being 80% of sales) hidden until late in the process
- No Advisor in the process matching willing & able buyers with prequalified businesses
We run nearly 100% success and average 1-2 buyers per business. Buyers and businesses are highly screened. Showing the business to too many people risks confidentiality.
Potential buyers generally depend on the size of the company’s profitability. The approach and preparation will be slightly different depending on which group is being targeted. Though the categories we outlined are far from exact, and there is a lot of overlap, determine the size group that coincides with your business.
|Company Size||Approximate Profits||Value Ranges|
|“Micro”||< $250,000||< $1 Million|
|“Small”||$250,000- $1 Milllion||$1 Million- $3 Million|
|“Medium”||$1 Million- $2 Million||$3 Million- $10 Million|
|“Large”||>$2 Million||>$10 Million|
Buyers likelihood for each size of company are as follows:
Likely Buyers by Company Size
|Buyer Group||“Mirco” Company||“Small” Company||“Medium” Company||“Large” Company|
|Individual||Highly Likely||Highly Likely||Somewhat Likely||Very Rare|
|Investment Group||Very Rare||Low Likelihood||Somewhat Likely||Highly Likely|
|Private Company||Very Rare||Low Likelihood||Low Likelihood||Highly Likely|
|Public Company||Very Rare||Very Rare||Low Likelihood||Highly Likely|
We utilize different processes depending on the Buyer Group we are targeting. For example, individuals value cash flow and how the business suits them, requiring less of a formal package put together and wanting to see the business and talk to the owner to gauge their suitability. Institutional groups prefer formal packages, focus on key metrics, and only visit a company that pass prescreens.
It was always believed that a business will sell for a premium if the buyer is a strategic buyer doesn’t hold true anymore. The buyer’s motivation is a key factor, and it is worthwhile to understand each group’s typical motivations to determine why we maintain many relationships with each type of buyer group.
The Individual Buyer represents the largest number of prospective buyers for micro to small privately-held businesses. Target companies for individuals generally have gross revenues up to $3 million to $5 Million. Most individuals interested in buying a business are those who lost a job, dislike their current working situation, or have an entrepreneurial spirit and believe buying an existing business has less risk than starting a new business.
Most Individual Buyers seek companies that are a fit with their background and skills, have a diversified customer base, are very stable, and demonstrate profitability that can provide them their most recent salary, after debt service, with some upside potential for growth. These qualifiers give Individuals confidence in the viability of the business going forward.
There are numerous Individual buyers looking at any time. Though some are permanent window shoppers and enjoy the chase, there are numerous candidates that are very serious buyers and are ready to pounce on attractive opportunities. It is important to determine what buyers are truly serious.
Individual buyers typically struggle in their pursuit of larger businesses due to higher down payment requirements, especially when the business is too large for an SBA loan. We find Individuals to be excellent candidates for businesses on the small scale.
THE INVESTMENT BUYER CATEGORY
The most significant shift in the M&A market in the last few decades is the proliferation of Private Equity Groups (PEGs) or search funds. As early as ten years ago, PEGs only were interested in companies with $5 Million or greater EBITDA. As the groups multiplied and some PEGs could not source opportunities, certain PEGS lowered the EBITDA threshold to $2 Million and now there are PEGs seeking businesses with EBITDA of $1 Million. PEGs raise capital, buy companies, cash out in 5 to 7 years, and reinvest or return the money to investors. PEGs need to buy and sell companies to complete the cycle. The growth in numbers of PEGS has increased the pool of buyers and, in most cases, created a shortage of supply of companies for sale. It is always a Seller’s market, if the business meets the standard PEG’s requirements and is priced competitively.
Though so many PEGs exist, most have the same characteristics in businesses they buy. They want:
- Predictable and sustainable cash flow
- Management in place, no need to bring in new management
- Low customer concentration
- Defensible market position
- Preferably manufacturing or distribution, service can be okay
- Minimal perceived risk (a topic for another day)
- Realistic and believable growth opportunities
- No environmental or legal risks
- Scalable (important)
- Potentially attractive exit
- Possibly a strategic add on to an existing portfolio company or use as a platform company
We know the Private Equity market; you don’t need to know it. There is nothing wrong with selling to the Private Equity market, in fact we have found it can be advantageous in some situations to strategic buyers.
THE STRATEGIC BUYER CATEGORY
Strategic Buyers are normally a public company or a larger privately-held company or a Private Equity Firm that owns a company that is in the same or complementary industry as the target company. Strategic Buyers may pay somewhat more than other types of buyers because a strategic buyer may gain a variety of financial benefits and quick business growth. We say “may” because this is not always the case.
Strategic Buyers typically target companies that have gross revenues over $3 million, many times much more, that offer a unique attribute or improve their competitive position or pricing, such as opening in a new market or customer not previously served or obtaining product lines and/or services not previously provided. Sometimes the strategic buyer can benefit from pricing power. Target companies can be especially attractive where economies of scale are possible where the acquiring company can obtain post-deal expense savings, such as elimination of dual facilities, support staff, or other overhead expenses. An example is a large payroll company buying similar, but smaller payroll providers. Nearly all expenses incurred by the small acquired payroll company go away after the purchase as the customers are rolled into the large payroll company.