When it comes to selling a business, owners will likely encounter a variety of potential buyers, each with their own set of advantages and drawbacks. In the world of mergers and acquisitions (“M&A”), two primary categories of buyers stand out: strategic and financial. Particularly within the middle market, the bucket of financial buyers can be further broken down into private equity groups, independent sponsors, family offices, and employee led acquisitions also known as management buyouts. Each of the different buyers presents unique challenges and opportunities when looking to sell a business.
What are the pros and cons of each?
Strategic Buyers: Strategic buyers are companies that seek to acquire businesses related to their existing operations with the aim of enhancing operational efficiencies and holding onto the acquired business for the long term. Motivated by the creation of synergies, strategic buyers tend to focus on acquisitions that allow them to realize operational streamlining, market expansion, and access to new technologies. Strategic buyers often acquire businesses for the long-term and use the function of M&A to accelerate growth.
- Pros: Strategic buyers often acquire businesses that align with their current offerings, providing a sense of comfort to the seller that their business will be in capable hands. These buyers are more likely to commit to the long-term well-being of the acquired company, both from an operational and financial structuring standpoint
- Cons: A major concern when dealing with strategic buyers is confidentiality. Sharing sensitive financial information with a competitor can be risky, especially if the deal falls through, potentially leading to misuse of confidential data. However, there are several ways when dealing with a strategic buyer to limit this risk, one being redacting customer and supplier names until you can be more certain the transaction will close.
Private Equity: Private equity groups generally acquire businesses with the intention of holding them for a relatively short period (typically four to six years) and then selling the acquired business to realize gains for their investors.
- Pros: Private Equity groups often have readily available capital they have to use to acquire companies, and they have additional funding available for future investment in operations, if needed.
- Cons: Private equity firms primarily aim to sell the business within a few years, which may not align with the long-term prospects of the seller.
Independent Sponsor: Independent sponsors are individuals who typically have investors along with their own personal capital and are seeking to acquire a company that they can run for the medium to long term. This type of buyer group is most synonymous with “entrepreneurship through acquisition.”
- Pros: Independent Sponsors are often investing for the longer term and look to acquire companies where they can step in as management to run the company.
- Cons: Independent Sponsors often must get approval from their investors to get funding for the deal, leading to greater uncertainty to close.
Family Office: Family offices are self-funded entities from wealthy families that take a long-term approach to investing their capital. They typically rely on a strong management team to oversee the daily operations of a business.
- Pros: Similar to strategic buyers, family offices often invest for the long term, providing confidence about the future ownership of the company.
- Cons: Family offices often rely on a management team to run the company, which can entangle an owner-operators transition out of the company post-closing.
Management Buyout: Selling to an employee or group of employees is also an option that many business owners find intriguing.
- Pros: Selling to an existing employee or group of employees provides more certainty about who will run the company and how operations will continue.
- Cons: Maximum value may not be achieved when selling to an employee, as they will oftentimes need to line up financing to complete and deal and most oftentimes the consideration received by the seller will be paid over time in the form of seller financing. Without a full, broad auction process, significant value can be left on the table.
Conclusion:
There is no “right” answer regarding which type of buyer is best for any given company. Often, many of the options are viable and will result in a favorable outcome. Whether it's a strategic buyer, private equity group, independent sponsor, family office, or management buyout, each option has its unique set of benefits and potential drawbacks. By carefully considering your circumstances and objectives, you can make an informed decision that aligns with your vision for the future of your business.
