When a business owner decides it is time to sell, the next thing they often wonder is "who will buy my business?" Many private business owners tend to underestimate the number of buyers who may have an interest in their company. Buyers can be classified in two broad categories, strategic buyers and financial buyers.
Strategic Buyers and Financial Buyers
Strategic buyers are interested in how a company fits into their own long-term strategic business plans. The acquisition must expand their current business into a new market, add a complementary product or service, or become an addition to their portfolio. As a result, strategic buyers may pay a higher price when compared to financial buyers. However, strategic buyers may be competitors, suppliers or customers and in these cases it’s very important to manage how confidential information is handled.
Financial buyers can generally be classified as investors interested in the financial return they can achieve by buying a business. They are interested in the cash flow generated by a business and the future exit opportunities from the business. Due to the abundance of capital available to financial buyers, they have recently become very competitive in valuations when compared to strategic buyers.
Types of Financial Buyers
Private Equity Group (PEG)
Private equity groups are investment management companies that provide financial backing and make investments in operating companies through a variety of strategies including leveraged buyouts, venture capital, and growth capital. The PEG is responsible for identifying suitable business opportunities, screening those opportunities, and selecting ones to acquire. One of the private equity groups we stay in contact with recently expressed the following:
“With all the uncertainty that has evolved over the past few months, we wanted to take this time to reaffirm we are still continuing to seek out and acquire fundamentally sound businesses. While there are many unknowns in this current state (especially related to the M&A sales process), we wanted to emphasize that our firm is staying committed to a long-term outlook as it relates to acquiring attractive businesses today.”
private equity group
Private Equity Groups can fall into one of three categories:
- Committed Funds: Receive money from institutional investors, such as pension funds, college endowment funds, and very high net worth individuals. Each fund has a defined investment horizon, which is typically 5- 7 years, in which the investors anticipate receiving their capital back and related returns. The managers of the fund are typically paid a management fee and participate in the gains realized on the investments made by the fund.
- Pledge Funds: In a pledge fund, the investment manager creates an investment vehicle for purposes of making an investment in a single target opportunity. Unlike a traditional committed fund model, investors considering an investment in a pledge (or deal-by-deal) fund, have full transparency on the underlying investment that will be made by the fund, and are able to decide whether to commit to the opportunity. Pledge fund investors rely on the knowledge and expertise of the private equity group that organizes the fund, and make “soft” commitments to the fund prior to its investments being identified. Investors are then given the right to “opt out” of each investment opportunity that the manager of the pledge fund presents to investors. One pledge fund manager we have worked with in the past was able to include capital partners who could bring strategic knowledge to the investment, as well as capital.
- Search Funds: These are vehicles for proven entrepreneurs to raise funds from investors interested in making private equity investments. In the search fund model, a small group of investors back an operating manager(s) to search for a target company to acquire. The manager typically has an established track record in a specific industry, and wishes to take over day-to-day management. Search funds may have a longer investment horizon.
Family offices are private wealth management advisory firms that handle investment and wealth management for a wealthy family, with the goal being to effectively grow and transfer wealth across generations. Family offices can be single family or multi family offices. More recently, many family offices have hired an experienced professional from a traditional private equity firm to search for companies to acquire. They typically have a longer investment hold period than traditional funded private equity firms.
Individual buyers are high net worth individuals, who have management experience or industry specific expertise, and are interested in owning their own company. They typically have personal wealth to invest as well as other financial backing.
Our client, the seller, must clearly identify their objectives in the transaction for our firm to identify the right type of purchaser. Knowledge of the objectives, funding sources, and investment time horizons of purchasers must be taken into account to successfully achieve our client’s goals.
If a company has been profitable and was a good acquisition candidate prior to COVID-19, there are interested buyers in the market. In fact, inquiries from active buyers continue to remain strong and our firm has successfully completed four transactions since the shutdown started. While there are additional issues to navigate to get the transaction to closing, related to PPP loans and underwriting, transactions are closing. In addition, Central Texas remains a very attractive market for both strategic and financial buyers.