There are four exit options (type of buyer)
Selling a business is one of the most challenging situations that you as an entrepreneur will face. There are many questions to answer, decisions to make and steps to take before you can finally sign on the dotted line.
One of the big questions, sometimes answered too late in the sale process is what “type of buyer am I hoping to attract?”
There are essentially four types of exit options that a technology entrepreneur needs to consider when looking to sell a business:
- The strategic buyer (trade or industry)
- A financial buyer (Private Equity)
- A management buyout (MBO)
- An experienced high net worth individual (HNWI)
Each option has their own pros and cons so take the time to consider the merits of each before compiling your target list. In general, most businesses will have a good understanding of who the potential strategic buyers would be but identifying the right PE acquirer or securing the necessary funding for a MBO can be a more challenging proposition.
The type of buyer you will attract will also be influenced by:
- the sector you are in,
- your financial performance to date,
- the recognition of your product within the market you operate in,
- the growth opportunities your firm has going forward and,
- the importance/expertise of your management team (both at top level and one level down and, finally,
- the level of (patented) IP that you own.
The Strategic Buyer
One of the most likely buyers of a privately-held business is another company in a similar industry, pursuing growth through acquisition; a business looking to offer a wider range of products/services to their customers and/or gain further market share. In addition to targeting technology businesses (with a high level of IP) that would complement their existing product portfolio, they will also target businesses that would allow them to develop new forms of technology.
- May enable you to achieve a premium valuation, as strategic buyers often pay a higher price either because of the synergies that make your business a natural fit or the step change advantage they think they can achieve.
- They tend to focus less on future profitability (than a financial buyer) and more on what your company could be worth in their hands (how much more of your product they could sell through their larger sales channels).
- Most strategic buyers will require a two to three year Earn Out period for the majority shareholders of the business and the senior management team.
- Strategic buyers will always look to optimise financial and operational synergies which means that that your firm could be facing post-acquisition redundancies as they remove duplicated resource.
- The brand and identity you’ve worked to build for your business may be absorbed by that of a competitor, but usually only after a pre-agreed period (generally one to two years).
Private equity (PE)
A Private Equity firm has access to capital from investors (high net worth individuals or funds) and banks which is available, in exchange for a (controlling) equity stake, to make strategic acquisitions of private companies. Their aim is to increase the overall value of those investments and then realise their gains by means of sales, flotation (IPO), merger, or through recapitalisation (usually within a three to seven-year window).
While there are no hard and fast rules about private equity investment most PE firms have various criteria, which needs to be met before they will consider an investment. Most PE firms will require a minimum level of turnover/profitability, a minimum annual growth rate and for the business to be well positioned to benefit from future growth in a market with significant long-term potential.
- A PE firm may not acquire 100% of a business, in order to keep the Founder/management team incentivised; this allows the shareholders to retain a certain amount of upside and therefore benefit financially from a future (outright) sale.
- They will structure the company so that it can achieve stronger performance and growth so this is an opportunity to see your business develop further while reducing ownership risks.
- PE firms like to retain existing staff and management (if they are performing).
- Access to a large network of contacts, in terms of potential new clients, colleagues, advisors and potential future acquirers or acquires.
- PE firms assist management teams in making domestic/international acquisitions and will often provide additional (financial) analytical capabilities that a firm may not have to drive M&A growth.
- Depending on the type of investment, PE firms may burden the balance sheet with a considerable amount of debt and as a result, interest payments will need to be financed from future cashflow (thereby putting pressure on the business’ balance sheet).
- Most PE firms who are looking to make a portfolio acquisition (a standalone acquisition as part of their investment portfolio as opposed to a ‘bolt on’ acquisition for one of their portfolio companies) will want to take a controlling stake, usually above 65% of the business.
- While PE firms tend not to get involved in the day to day running of a business they will usually require board representation and regular monthly board meetings and financial updates.
A management buyout (MBO)
A successful business is often founded on the quality of the people who work for it. The management team will have been directly involved with all aspects of its growth and profitability. They know the business, its products and its marketplace intimately.
- Selling the business to the management team can be gratifying and can make selling the business much simpler.
- The company’s strategy will probably be maintained after the sale but this will depend heavily on how the company is performing.
- It can also allow you a gradual exit, if desired.
- An MBO is likely to require the management team to take on greater financial commitments and risks than they have done before.
- They may not be able to offer a price comparable with other buyer’s offers.
- There is much that can go wrong at the last minute: one of the management team gets cold feet, or because financing cannot be secured; we therefore recommend that as a precaution you should always pursue alternative buyers at the same time.
Experienced HNWI utilise their own resources, rather than outside finance, to invest in other companies. Typically, these are individuals with sector experience who are looking to buy a business (platform company) with a well-developed management team and infrastructure which they can nurture and develop.
Unlike the financial buyer, the experienced HNWI will be very much part of the growth of the business, overseeing day-today operations. But they are looking to rapidly increase revenues and profitability to facilitate a successful and relatively quick exit from the business within a three to five-year window) so will often make additional acquisitions rather than rely on organic growth.
A lot of experienced HNWIs are entrepreneurs who have previously built and sold businesses in a similar industry areas and believe that they can apply a similar successful growth methodology to other businesses.
- The experienced HNWI tends to provide not only acquisition finance but also a significant amount of expertise that can benefit your business going forward.
- HNWI usually use their own source of funding for an acquisition and are therefore not subject to outside financial providers, such as banks, to provide the necessary funding for an acquisition.
- Experienced HNWIs are often more involved in running a business post-acquisition and this can lead to issues with the existing management team if strategic thinking is not fully aligned
- They may not be willing to pay the same premium as strategic investors as they may not be able to derive the same financial/operational synergies from an acquisition that strategic buyers can.