Understanding Investment Business Buyers

The cost of leaving out investment business buyers when selling your business may be the difference between success and failure. The business sale success rate is about 25%. Business owners who take the time to prepare for the investment business buyer can swing the odds significantly in their favor.

Investment business buyers have the capital to buy larger businesses.  This answers the question of why should business owners be interested in investment business buyers?

There is a point when your business value is higher than individual buyers and your competitors can afford. As your business value increases the buyer pool is reduced. If your business value is over $5 million, investment business buyers may be your best (or maybe your only) buyers. Investment buyers are most likely already buying the largest players in your industry.

The cost of leaving out investment buyers when selling your business may be the difference between success and failure. The business sale success rate is about 25%. Business owners who take the time to prepare for the investment business buyer can swing the odds significantly in their favor.

Sellers rarely understand why their businesses are not attractive to their buyers. Business owners need to understand what their target business buyers are looking for and they must attract these buyers if they are going to maximize their value and chance of success. Leaving the investment business buyers’ desires out of your preparation plans will likely jeopardize the sale of your business.
The size of your business has a great deal to do with the expectations of an investment buyer. A business that is generating $1 million EBITDA can be a target for a search fund or as an add on acquisition for a platform company. When your business is generating $3 million + in EBITDA businesses become targets for platform acquisitions. Platform acquisitions allow investment business buyers to invest in the purchase and then make subsequent investments in growth opportunities. These businesses are very desirable from an investment standpoint because they have a much larger investment opportunity for the buyer.

Let’s look at the common criteria for investment business buyers.

Search Fund Business Buyers

Search funds combine funding sources with experienced CEOs that are looking for companies they can buy & grow with the investment from the funds. These CEOs earn equity in the process of building these companies.

If your business is going to be a target for a search fund you will likely want to have the following characteristics:

  1. An owner that is willing to facilitate a transition to the new CEO.
  2. Partially realized growth opportunities and a 12-24-month growth plan.
  3. A middle management team that can execute the vision.
  4. History of growth.
  5. Financial information that can pass a CPA review.
  6. A financing structure that facilitates the deal.

Search fund buyers may take a bit more risk on the management team because they have a talented CEO candidate who is ready to step in and put their back into developing and executing the company vision. They will expect the owner to be there training the new CEO and advising after the sale to ensure that the business is successfully growing and meeting projections.

Search fund firms buy companies that need new leadership to grow. They have similar financial requirements to any investment business buyer. They will be focusing on how the acquisition of your business will increase the value of their portfolio. Search funds are commonly buying companies from business owners who are ready to exit. After this is done, the CEO takes the role of the owner and facilitates the next level of growth. If your business has $500K to $5 Million in EBITDA you may be a candidate for an search fund buyer.

 

Platform Add-on Business Buyers

Investment owned platform company values are grown with a combination of organic and acquisitions. Your company may have desirable customer(s), technical advantage (s), or geographic territory(s). If you are a highly desirable add on target the platform buyer may be able to provide a higher valuation than other buyers.  The Add-on buyer may have a value increase on your business simply by adding the revenue and profits to their business.
A great example of this is when private companies are acquired by public companies. A public company may be valued at 6X EBITDA and the private company is valued at 3X EBITDA. If a public company buys another business with $1 Million in EBITDA they increase the value of the public company by $3 million just by doing the transaction.

If your business is going to be a target for an add on acquisition you will want to have the following characteristics:

  1. An Owner that is willing to facilitate a transition into the acquiring business.
  2. A new geographic or market sector, complimentary specialized core competency or technology.
  3. Partially realized growth opportunities and a 12-24-month growth plan.
  4. Solid first level supervisors and department leaders.
  5. History of growth.
  6. Financial information that can pass a CPA review.
  7. A financing structure that facilitates the deal.

Investment firms will buy add on companies to create additional value to the platform. They have different requirements from other buyers. They will be focusing on how the acquisition of your business will increase the value of their platform company. If a company is an add on target, they are typically being acquired to gain revenue, market share, or complimentary technology.

Add on acquisitions can bring a higher return for the seller because the value to the buyer may be higher if it offers a significant value increase to the platform. The acquiring company will likely be looking at how they can integrate the best of the acquired company into the platform and reduce the overhead costs for operating the company. This may bring significant changes to the company being acquired. If an owner’s primary goal is legacy, then this may not be a good choice.
If your business has $500K to $5 Million in EBITDA and you have a unique market offering or technology others in your industry would value, you may be a candidate for an add on acquisition.

Platform Business Buyers

Platform acquisitions are the foundation of private equity investments. Private equity firms are setup to make major investments in these “platforms”. Platform companies are selected because they have strong financial performance, a strong executive team, are growing, and can utilize investment to accelerate or increase their growth. Investment business buyers put a premium on platform acquisitions because they can deploy a large amount of capital. Often the platform company’s initial purchase investment is the smaller part of the total investment over time. Platform companies allow strategic roll ups of companies. The combination of these revenues often results in a value gain by moving revenue into the larger company. (just like the add-on example)

The platform business buyer will be looking for the following characteristics:

  1. An executive team that can develop and execute the long-term strategy.
  2. A 5-year plan including acquisition and investment opportunities to accelerate growth.
  3. Partially realized growth opportunities and a 12-24-month growth plan
  4. A base operation that has the strength to integrate other businesses under the operating company or as vertical partners.
  5. History of growth
  6. Financial information that can pass a quality of earnings review.
  7. A financing structure that facilitates the long-term investment opportunity.

The platform investment buyer is going to be concerned with market risks and the executive team’s ability to execute a long-term growth strategy. The business will be considerably more attractive if they have a well thought out post acquisition investment strategy to significantly increase overall platform value.

 

Summary

Each type of investment business buyer has a distinct set of characteristics they look for in their acquisitions. Taking the time to really understand where your company fits, the type of legacy you want to leave, and planning your approach to making the business attractive will provide significant returns.

If you build your business correctly, you will be an attractive acquisition and a sound business investment for the investment business buyer.

Understanding investment business buyers and different acquisition criteria can help your company become more attractive in the eyes of investors. Focusing on the investment buyer’s desires will maximize your profits and overall success.

Damon Pistulka

Business management, value improvement, business sales.

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Exit Your Way® provides a structured process and skilled resources to grow business value and allow business owners to leave with 2X+ more money when they are ready.

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