Identifying Potential Buyers

Before building a plan for selling your business, you will first need to do some research into who your potential buyer may be. Understanding the needs and expectations of a buyer will enable you to be better prepared to present your business in a positive light. It is important to have realistic expectations and a good understanding of the different factors that drive value in the current marketplace.

There are three main groups of buyers interested in private small-to-midsize businesses. Each category has its own characteristics and motivation, which is directly connected to the price each buyer is willing to pay.

Individual Buyers

Individual buyers represent the largest group of potential buyers. Most individual buyers are looking for companies with gross revenues of $200K to $3M. This is because business with revenues of under $200K do not provide the necessary earnings, while businesses worth over $3 million are more difficult to finance in a highly competitive financial climate.

Individual buyers also prefer to purchase businesses that have well documented procedures, a seasoned and knowledgeable staff and management, a diverse customer base, accurate financial records, and net earning equal to or higher than the buyer's current salary. These factors, along with a potential for growth, give buyers confidence in the stability and continuity of your business. A company that utilizes competent employees to run daily operations is much more appealing to a buyer than a company that relies heavily on the presence of the owner.

Although individuals looking to buy your business may not have the latest and greatest valuation tools, they will have the the ability to determine if your business will provide them with the desired cash outflow to allow them to live comfortably, repay any loans necessary to purchase the business, and recoup on their investment.

The Investment Buyer

Now numbering in the thousands, Private Equity Groups, have been a fast growing sector of the population looking to buy established businesses. The main goal here is to buy a company, grow it in market share and revenue, and then cash out within five years. Investment buyers may sell successful businesses to a public company or take the company public themselves. Primarily influenced by return on their investment, these buyers choose to purchase companies with gross revenues of $5M+ with superior profit margins. Investment buyers like businesses that are unique and have great potential in market niche and position, strong growth and track records, deep management teams, low customer concentrations, and a plan in place to combat import competition.

The Strategic Buyer

A strategic buyer is most likely a large private-held or public company that wishes to purchase businesses that will add new products or customers while reducing production or service costs. These buyers are likely to pay more for your business because they stand to gain a number of financial benefits and enhanced growth.

Strategic buyers usually search out companies that pull in more than $3M in gross revenues, or perhaps those that offer a chance to expand a product line or customer base. Potential buys are given an extra look if they provide the purchaser with significant savings after the sale, such as the elimination of overhead in the form of redundant facilities and staff.