Private business exit: Q7. Which buyer types should you target?

Earlier this year, I wrote about the pros and cons of external investors, in the context of firms seeking expansion capital, but only touched briefly on exit options. In my series on planning for the sale of private businesses, we’ve now reached the point where we need to think about the types of buyers you might approach. Note that I’ve used the phrase “type of buyer.” You might well have a specific potential buyer in mind, but let’s first spend a little time being more general in our thinking. There may be a class of buyer which you hadn’t considered. Let’s think of some possibilities:

Trade buyers

• Your immediate competitors
• Potential competitors in other geographic or vertical markets, who might want your markets, products, processes, people or sources of supply
• Players in related product markets who might want to add your speciality to their portfolio
• Any of your suppliers who might want to move further down the value stream
• Any of your customers, distributors, service partners, etc. who might want to move further up the value stream
• Family working in the business
• Staff (management buy-out)
• Smart individuals in your industry that are looking or the chance to run their own business (management buy-in)

Financial buyers

• Private equity firms
• Investment companies
• Wealthy individuals and families
• Consortia of the above
• The general public; ie. investors in listed or unlisted shares (via a share float)

Some of these buyer types are mutually exclusive. You would not normally pursue a share float while at the same time offering the business for sale to a potential 100% acquirer. Even with a straight sale, it’s usual to narrow down the field to keep the sale process both confidential and manageable. For example, smaller highly specialised technology businesses are usually sold to trade buyers because they can derive the most value from them while financial investors are unlikely to be attracted (but not always). It’s like any sales process; define your target market: which types of buyer are likely to place the highest value on your business. You save time and expense by not targeting unlikely buyers.

NB. I have distinguished private equity firms from investment companies. PE players tend to be shorter term owners, often in association with MBOs and MBIs, or in their own right where they see potential for further break-up or consolidation. Investment firms are more typically long term owners, although sometimes in assocation with MBOs and MBIs.

PS. I’ve made an assumption here that you are selling. Some people want to gift their business (or a large part of it) to staff, family or charity. Angus Tait and Roy McKenzie in New Zealand, and John Lewis in Britain are classic examples. Each case is unique and requires a unique solution.

First posted August 18th, 2008