Business buyers come in different shapes, sizes, and motives. Having a good exit plan can provide you peace of mind and future financial security. I recently spoke with Tom Gledhill, founder of Delta Capital based in Boston, who has built and sold four different businesses in his career. Two mistakes he made with his businesses were lack of planning for his exit and poor strategy to attract a preferred buyer who would pay a premium price for his companies.
Initial steps to a solid exit plan start with understanding the types of buyers and their goals as buyers. There are three general types of buyers: The strategic buyer, the financial buyer, and the individual buyer.
The strategic buyer can be any of the following a competitor, a major supplier, or a major customer. An example of a strategic buyer in the news was Fed Ex buying Kinko's copy center franchises.
The strategic buyer is interested in increasing its company-wide earnings and cash flow for the short and long term. Strategic buyers also are interested in economies of scale and strategic fit with its overall profit goals. They prefer to pay for the seller's stock, not its assets, because their desires are to increase earnings to their stockholders. It usually can cash out the seller and has little or no interest in future time commitment from the seller.
Financial buyers will also pay hefty prices and pay for seller's company stock.
A major difference in this buyers' motive vs. strategic buyers are that the buyers generally will not to pay as high of a premium as strategic buyers. Financial buyers mainly are private equity groups who are interested in a portfolio of companies. The private equity groups are looking for bargains or companies with tremendous future profit growth.
Many of their prospects are companies that need to improve their internal efficiencies or to scale up operations from a regional to a national scale. Private equity groups usually have the ability to cash out the sellers but may require a significant future commitment from the sellers including profit targets in the agreement.
Individual buyers may be sole owners or groups of investors who gather funds to buy various kinds of businesses. Individual buyers generally have different motives on structuring their deals. Individual buyers, many times, wish to buy the seller's assets not the company stock. The individual buyers are interested in maximizing the company's depreciation to reduce the tax liability in the early years after the purchase.
These buyers are usually the weakest buyers financially. Financing is a major issue in negotiating these deals. The individual buyers usually require the sellers to commit to two or more years with profit targets and other terms to complete the sales.
Scott T. Wait, a certified public accountant, is a partner in RS Wait, Chtd. of Reno and a managing director for the local office of The McLean Group, an investment banking firm. Contact him at 825-7637 or swait@mcleanllc.com.
