Waypoint Private Capital answers this question for middle market privately held companies.
Whether you have spent the last five years building a business or the last thirty, there comes a time when every business owner realize it is time to sell his business and move on to the next chapter of his life. Typically, the first question you will have after deciding to sell is, “Who will buy my company?” A few names might immediately come to mind when you ask that question, but you should really think through all of the possible buyers and the implications of selling to each type of buyer.
Three Types of Business Buyers
Buyers of businesses can generally be grouped into three categories:
1. Strategic Buyers
2. Financial Buyers
1. Strategic Buyers
Strategic buyers are either your competitors or companies that are not in your industry but would benefit from making an acquisition in the industry. They are seeking sales and distribution synergies or cost synergies . There are usually strategic buyers for most any size company in every industry. The team from the strategic buyer that is working on the acquisition might have significant experience evaluating acquisition targets and getting deals done, or it might be their first deal. This usually depends on the size of the company. At Waypoint Private Capital we have shown deals to companies, such as Procter & Gamble, and were very impressed at how quick their team moved and how organized they were in evaluating the company. However, we have also shown deals to teams that stumble through every aspect of making an acquisition. The experienced and organized buyers get through due diligence quickly, with far fewer questions and requests than financial buyers, and have a fairly high certainty of closing on the acquisition. Inexperienced buyers take a long time to move through the process and have a lower likelihood of closing on the acquisition. You might be wondering why you should waste your time with inexperienced buyers. The answer is simple; although the process is painful, they are more likely to overpay for your company.
2. Financial Buyers
There are two types of financial buyers: professional investors and individuals. Professional investors typically work for private equity firms that have raised millions of dollars from pension funds and are in the business of buying and growing companies and then selling them again in five to seven years. Individual investors are usually in the market to buy a single company, manage it, and sell it much further down the road. There are professional investors who will invest as little as $1 million in a single company and others who will not return your call unless the acquisition is $1 billion or more. Individual investors are much better suited to smaller deals. They will often buy companies valued at anywhere from $50,000 to $5 million or more. Companies with an EBITDA  of $5 million to $20 million will have the largest number of financial buyers interested in them. Financial buyers will conduct extremely thorough due diligence, but if everything is as they expect, have a high likelihood of completing the acquisition. Professional investors always want to see a history of strong growth if they are buying your company as a stand-alone acquisition. If you have not been growing, then financial buyers are not an appropriate target.
Current management, the employees base, and family members are all considered insiders and are often potential buyers for a business. Current management is an obvious choice when considering buyers. They may already own part of the company or are simply interested in buying the company so they can continue to work and make a good return on their money. This is called a management buyout (MBO) and is a very common way to sell to insiders.
The owner and management team might also organize an employee stock ownership plan (ESOP) whereby the management team and employees buy the company from the owner in a leveraged transaction. Lastly, you may want to keep the business in the family and sell it to your children or grandchildren. Insiders usually do not have any experience making acquisitions, often do not have the resources to compete on price with strategic or financial buyers and have a lower likelihood of completing the acquisition. The upside is that this group will conduct the least amount of due diligence because they already know the company well and will make the fewest changes within the company after the acquisition.
Goals for Selling Company
Depending on the size, growth, and profitability of the company being sold there may be a large pool of potential buyers. To narrow that pool down you should clearly outline your goals for the sale of the business. The four most common goals owners have revolved around price, structure, employees, and legacy.
Price is the easiest to decide. Is the sale price the most important factor to you in the sale? The highest bidder wins – end of discussion. If that is the case, you should focus primarily on strategic and financial buyers. Larger strategic buyers are likely to pay the highest price for a business because they will often give the seller credit for some of the synergies they expect to achieve after the acquisition.
If the strategic buyer is a public company, they also have a lower cost of capital and lower required return compared to the other buyer types so they can pay a higher price for the company. However, financial buyers should be included in the process as well. They have higher expected returns for their capital but can use leverage to increase those returns and stretch the price they can pay. At a minimum, they will create competition for the strategic buyers and help to drive up the price. Insiders usually do not have the resources to compete with strategic or financial buyers when price is the most important factor.
A discussion about the structure of a sale transaction can get very complex, but in its simplest form boils down to how you will get paid. If we marketed the company and were able to get three final bids that looked like the following, which would be more attractive to you?
Offer A – $25 million sale price. 100 percent of the purchase price will be paid by issuing you $25 million of the buyers publicly traded stock at close. You will be prohibited from selling the stock for six months.
Offer B – $24 million sale price. $18 million paid in cash at close. $6 million paid in cash as an earn-out over the next three years if certain earnings goals are met by the company.
Offer C – $22 million sale price. $4.4 million paid in cash at close. The remainder of the purchase price is borrowed from the seller and paid back over the next five years.
Your current financial needs, confidence in the business, risk tolerance and deal experience will determine how you react to these structures. Offer A would come from a strategic buyer. It is the highest price, but you are at risk that their stock price might fall over the next six months. If the company looks very solid and is a leader in the industry you might think it is worth the risk because the offer price is the highest. What if you had sold to AIG for $25 million of stock on May 2, 2008, and had to hold their stock for six months? You would have effectively given your company away for nothing because their stock price fell to almost zero within the next six months.
Offer B would most likely come from a financial buyer. It looks pretty attractive if the company can meet the earnings goals set forth in the earn-out. Those goals are usually based on management projections given to the buyer prior to the offer. Can your team meet those goals, or did you stretch them to get a better offer? Might you end up with only $18 million, which is the lowest of all the offers?
Offer C is a likely structure from insiders. They will often scrape together all the money they can from savings, friends, and family to come up with the cash due at closing, but it is a small portion of the overall purchase price. There is a risk that you will not collect on a portion of the money owed to you after the initial payment. If employees or legacy are more important to you than price and structure you may very well prefer Offer C.
The culture at every company is different. At some companies the employees are treated like family (and often are family), whereas at other companies the employees are just there to get a job done and strong bonds are not formed between the owner and the employees. The different types of buyers will all have a different impact on the employees of the company. Strategic buyers are more likely to have the most detrimental impact on the employees. They are often trying to realize cost synergies, so may consider firing certain members of the management team who are redundant after the close of the sale. Strategic buyers might also close or move facilities, which will impact many other employees within the company and have an impact on the city in which the facility is located. Financial buyers do not have synergies to realize and are looking for growth instead. They often hire additional employees to help grow the company. They expect a lot from management and will quickly replace any member of the team who is not performing up to expectations. They will also reward management handsomely if they perform well. Insiders are the most likely buyers to maintain the status quo. They probably had a part in putting together the management team and hiring the employees, so they will make minimal changes to the management team or employee base.
Is it important to you that your company is still around fifty to one hundred years from now with the same name and a framed picture of you in the lobby? Alternatively, are you comfortable if your company is swallowed by a competitor and fully absorbed within twelve months with no remnants of the original name, and maybe even having the facility in your city shut down and moved to another state? Some owners care about leaving a legacy while others are not concerned with what happens to the company after they sell it. With which of those two extreme cases do you most easily identify? How important is legacy compared to the other factors discussed? If legacy is a very important factor you should focus on insiders and carefully chosen financial buyers. If it is less important, then you can be open to strategic buyers as well.
No matter what type of company you have, there should be plenty of potential buyers when you choose to sell. By determining your goals for selling the company and approaching the appropriate buyers you should have a favorable outcome. Waypoint Private Capital can help to bring enough potential buyers to the process that a competitive bidding environment is created, which results in a higher price and/or a structure and terms that are more favorable to meeting your goals.
 See Growth and Value Creation Through Acquisition for a further discussion of synergies.
 EBITDA = Earnings before Interest, Taxes, Depreciation, and Amortization
About Waypoint Private Capital
Waypoint Private Capital is an investment banking firm that educates and advises middle-market, privately held companies through critical stages of their business' life cycle. Waypoint helps business owners and entrepreneurs sell companies, buy companies, raise equity and debt capital for growth and recapitalization, and plan for a successful exit from the business.
To learn more visit waypointprivatecapital.com or call us at 608.515.3354 or 918.633.2647 and speak with a Waypoint Private Capital expert.
Steve Sprindis is co-founder and managing director of Waypoint Private Capital. © 2013 Waypoint Private Capital, Inc. All Rights Reserved.