What it takes to sell your business for the highest value

By Kavita Dutt

When contemplating the sale of a business, owners quickly realize the significance of discerning between potential buyers. Not all buyers exhibit the same inclinations, with some placing a higher premium on intangible assets and goodwill. This variance in perspectives can significantly impact the perceived value and, consequently, the final purchase price of the business.

In broad terms, buyers can be categorized based on their tendencies to assign higher or lower values to an acquisition. While these inclinations are situation-dependent, sellers benefit from being cognizant of these buyer archetypes to strategically target those likely to offer the most favorable value for their business.

A fundamental principle guiding this understanding is that buyers closely associated with the business may be inclined to offer less compared to those with a more distant connection. Visualize a bullseye with the business at its core. As one moves outward from the center, the perceived value of the business ascends, reflecting the varying perspectives of potential buyers.

Employees

At the center of the bulls-eye are buyers who are already a part of the business—employees. Because of their company knowledge and often their loyalty to the business, it is common for employees to step forward as potential buyers. However, employees generally offer the lowest bids for the purchase of the business.

Employees are often lacking the money and resources necessary to offer a higher bid, but they also have a lower perceived value of the business. They already have a deep working knowledge of the company, its operations, and the industry; therefore, they won’t pay a premium for access to that information.

Courting an employee buyer can also present some challenges and risks. Employees tend not to have the sophistication (and, as mentioned, the financing) to consummate a transaction. If the deal falls through, news that the company is for sale may leak to others, causing panic or stress. Worse yet, the failed deal may leave the employee buyers feeling slighted or upset, creating additional risk.

Competitors

Moving outward from the central point of the bullseye, the subsequent layer is designated for competitors. Competitors occupy a unique position, being in proximity to your business without direct affiliation. While they often boast greater resources and a higher level of sophistication compared to employee buyers, their existing industry knowledge and established operations lead them to place less emphasis on intangible assets and goodwill. This tendency usually translates into lower bidding on their part.

A competitor’s interest in acquiring a rival business primarily centers on expanding their client base. In some cases, they may explore avenues to diminish the value of your business by potentially eliminating your current employees and disrupting operations, all in a bid to secure a more favorable price.

Engaging in a deal with a competitor entails substantial risks. The transaction exposes your company’s proprietary knowledge to the competitor, creating vulnerability. Should the deal fall through, your business could face significant threats. Opting to pursue a competitor as a buyer necessitates careful consideration and the involvement of seasoned advisors, such as an attorney and a business broker, to structure the deal in a way that not only maximizes value but also safeguards the interests of your business.

High-Net Worth Individuals

Progressing Outward in the competitors, we encounter the cohort of potential buyers comprising high-net-worth individuals. These individuals possess the financial means to facilitate the deal, mitigating the inherent risks associated with employee or competitor buyers. Often, their motivation is rooted in seeking to “buy a job” or take over the role of the previous owner. Lacking comprehensive industry or operational knowledge to independently manage a business successfully, these buyers are inclined to place a premium on acquiring goodwill, a trained workforce, a stable client base, and other value-added elements.

While extracting a commendable value from high-net-worth individuals is feasible, it’s crucial to acknowledge that they may require extensive training and guidance to acclimate themselves—responsibilities typically shouldered by the seller. Sellers considering this buyer category should be prepared for a more involved transition, and the expertise of seasoned business advisors becomes invaluable in navigating any potential challenges that may arise.

Private Equity Groups

Venturing further from the heart of the bullseye, we encounter private equity groups (PEGs) as a distinctive group of highly savvy buyers. These individuals excel in crafting compelling offers and structuring deals with finesse. In certain instances, PEGs may oversee competing businesses or maintain a diversified portfolio across related industries. Their access to ample financial resources and established lender relationships enhances their ability to successfully close deals compared to many other buyers.

Motivated primarily by financial considerations, PEGs adhere to a stringent return on investment model. When pursuing an acquisition, they approach it with a predetermined target for returns. It’s important for sellers to note that, despite their propensity to extend generous offers that value goodwill and business assets, PEGs typically have a cap on what they are willing to pay. This limitation is rooted in their commitment to securing the anticipated return on their investment. While this imposes constraints, the upside lies in the attractive valuations they often present.

synergistic buyers,

synergistic buyers are essentially owners whose businesses complement the one they are looking to acquire. This synergy can manifest in various ways; for instance, their sales teams may target the same clients, but their product offerings differ. Alternatively, they might sell similar products but operate in distinct geographic regions. The allure for strategic acquirers lies in the potential strategic value they see in the acquisition, often leading them to offer the highest premium among all types of buyers.

These acquirers often identify areas of overlap between their existing business and the one they are eyeing. This overlap may present opportunities to streamline operations by eliminating redundant facilities or personnel, thereby reducing overhead and enhancing profitability. The prospect of expanding their current book of business into new or broader markets serves as a significant motivator for offering a higher purchase price.

It’s crucial to recognize that not every business on the market will attract every type of buyer. For instance, private equity groups typically engage with larger companies, limiting their interest in smaller enterprises. The options available when seeking a buyer hinge on factors like the size of your business, the industry it operates in, and prevailing market conditions.

Regardless of the nature of your business, it’s highly advisable to enlist the support of an experienced business broker or advisor. Their expertise can guide you through the intricacies of the marketplace, showcase your business’s strengths, and ultimately secure the highest value for the enterprise you’ve dedicated considerable effort to building.