Selling Your Business: How to attract the best buyer

15th January 2020

Peter Gray

Category: Blog, News, Press

In the final part of our series on exiting, we look at the four most common types of buyer, the processes involved for each one, and discuss what you can do to make your business more attractive.

As well as securing you a good deal, finding the right buyer will give you peace of mind that the company you built is in good hands. Not only that, your reputation may be linked with the business for years after you sell, so it will serve you well to ensure it stays profitable.

With this in mind, there are several types of buyer:

  • direct competitors
  • companies in related sectors
  • suppliers and customers
  • overseas companies
  • management buy-outs/buy-ins supported by private equity firms
  • high-net-worth individuals (HMWIs)
  • sovereign wealth funds
  • shell companies

The good news is that all of these buyers should fall into one of four categories, and depending on which categories they fall into, you can adapt your business to best suit them. The four categories are:

  • obvious trade buyers (e.g. direct competitors, suppliers and customers)
  • buyers for different parts of the business
  • strategic buyers
  • no obvious trade buyers (e.g. management buy-outs/buy-ins supported by private equity)

Obvious trade buyers

If there’s an obvious trade buyer for your business, you may better off pitching your business to that buyer only, and even moulding it to what they’re looking for (which you can find out). This is exactly what Seattle Coffee Company did to secure its sale to Starbucks in 1998. Expecting Starbucks wanted to soon enter the UK market, Seattle opened a series of cafes across the country that mimicked the Starbucks’ look and feel. This meant that when the time came for Starbucks to enter the UK, the logical step was to purchase Seattle Coffee Company, which it did for a premium.

With obvious trade buyer acquisitions there’s usually a compelling ‘synergy business case’ that attracts the buyer to the business. To make your business as attractive as possible to this type of buyer, you’ll need to work out what these business cases are by conducting your own ‘synergy assessments’.

Buyers for different divisions

If your company has two business models of equal size, which have separate customers and valuation metrics, there may be a case for dividing the company up and selling it in two parts instead. But be careful: this will only be worthwhile if both parts have enough critical mass in their own right, which they may not do once separated from the business as a whole. If they don’t, you’re better off keeping the parts together and selling it as one business.

Strategic buyers

By positioning your company strategically, you may attract a buyer that’s not very obvious, but that’s prepared to pay a higher price! The sale of hip replacement manufacturer, Finsbury Orthopaedics, to Johnson & Johnson is a good example of this. When we first prepared Finsbury for exit we approached potential private equity investors as buyers. However, during the due diligence phase it emerged that Finsbury’s biggest client would soon be manufacturing inhouse and would no longer need Finsbury’s services – with serious implications for the company’s profits. So with the PE buyers now out of the picture, we recommended Finsbury turn to product development instead, which it did by focussing on a new ceramic hip resurfacing product. Thanks to this strategic move, we repositioned Finsbury as a high-tech product company (rather than a medial manufacturer/supplier) and attracted Johnson & Johnson as a buyer. The pharmaceutical giant saw Finsbury’s new product as a $1bn per annum sales opportunity and acquired the business for double its original valuation.

No obvious trade buyers

Whether there’s an obvious trade buyer or not, it’s always worth considering a management buy-out backed by private equity – and this is something you should think about early on. In cases where there are no obvious trade buyers, a management buy-out (MBO) is the most likely exit route.

MBOs, MBIs & BIMBOs

For an MBO to be feasible, the management team must be strong enough to assume executive control of the business post-sale. In cases where a business is largely owner-managed, this is unlikely to be possible and a management buy-in (MBI) is more appropriate instead.

With an MBI, the private equity house (or your adviser) will select an MBI team to take over the running of the company post-sale. In return, the MBI team will take an equity stake in the business alongside the private equity house financing the bid. In situations where the existing management team has some of the skills required to manage the business, a buy-in/management buy-out – aka a BIMBO – is sometimes advised. In this situation, the new management team will typically comprise of some of the original management plus a newly appointed chief executive and/or finance director selected by the private equity house or an adviser.

To help you decide whether an MBO/MBI option is viable or not, ask yourself:

  • Is the current management team backable by a private equity house?
  • If not, would an MBI or BIMBO be a viable option?
  • Does the business have a strong enough growth profile to attract private equity investors in the first place?

It’s generally advised that you run the MBO process while also seeking offers from potential trade purchasers – so that all your options are covered. But this can be problematic; as potential buyers themselves, your management team could try to influence proceedings when liaising with the potential trade purchasers. There are several steps you can take to avoid this from happening, which we don’t time to go into here. To find out more, simply download the e-book that accompanies this series, The definitive guide to selling your business.

Understanding your buyers’ acquisition criteria

Once you have an idea of which buyer categories you’re interested in, ask your advisers if they can speak to them on a confidential basis. This way you can hopefully find out more about their acquisition criteria. For example, when preparing a community lender for sale we asked the key US purchasers several strategic questions about what they were looking for. We soon discovered they preferred a minimum of 20 branches, a nationwide physical presence, and a combined online and branch approach. Armed with this information, our client could decide an appropriate corporate strategy. What’s more, the purchasers also shared the criteria they would use to evaluate an acquisition opportunity. This proved incredibly valuable; by rating our client’s business against these criteria, we were able to devise a programme of operational improvements leading up to the sale.

Attracting buyers: A five-point checklist

  1. Start with a full list – include potential purchasers from different sectors and countries
  2. Think outside the box – it’s often the less obvious buyer looking for a strategic purchase that’s prepared to pay the premium price
  3. After some research, split your list into an a-list and a b-list of buyers, focussing on the a-list first
  1. Ask yourself: how would a buyer change the way my business is run and why?
  2. Start make those changes to attract buyers

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