How to find the right buyer for your business

Most business owners will at some point consider exiting their business. And yet, only a fraction of the businesses marketed for sale actually complete the transaction. Selling a business is a huge achievement and it is essential to give yourself the time and resources necessary. A key point which is often underestimated in this process is to identify the likely candidates who would benefit most from acquiring your business. A comprehensive list and a strategic plan to engage with them will potentially make a huge difference when it comes to maximising the value you achieve.

There are a range of buyers out there who might be interested in acquiring your business. These potential buyers can be categorised into six broad types. Each type has its own objectives, drivers and sophistication:

1. Competitors

Your competitors would typically have the most to gain from buying your business for a variety of reasons. It would potentially give them the opportunity to:

• Consolidate their position in existing geographic and product markets, thereby strengthening their pricing power with customers and suppliers;

• Diversify into new markets, thereby reducing risk and opening new channels for future growth;

• Access new technologies, intellectual property and/ or employees skill sets to strengthen their competitive advantage;

• Cross sell their products to your customers and vis versa; and/ or

• Improve profit margins by rationalising duplicate operating costs.

2. Customers

Some of your trusted customers may be also interested in purchasing your business. For example, they might see the opportunity to secure supply of components needed to manufacture their products. Or, if the customer is a wholesaler or retailer, to maximise their margin through the supply chain.

3. Suppliers

Similarly, your suppliers might be interested in optimising their margin through vertical integration, as well as securing a distribution channel for their products.

4. Businesses with similar core competencies

Some organisations may be looking to add a new division to their group. If their core competencies can be easily applied to your business, a platform acquisition may add significant value to their business. You see this with businesses whose core skill is managing occupancy and rate. Many hotels, cinemas, family entertainment centres, theme parks, pubs, health clubs and ski fields are often held by the same operator.

5. Financial sponsors

Financial sponsors are private equity firms who make acquisitions financed with a high level of debt to produce a leveraged return on equity that they’ve raised from investment managers, superannuation funds, family offices and high net worth individuals.

Private equity firms like to acquire businesses led by capable management teams with a clear strategy to create value by investing in growth, or a restructure. They will aim to exit their position via an IPO or trade sale after a typical holding period of up to five years.

To assess a private equity firm’s likely level of interest in your business, you should review their industry and investment size preferences, as well as their current and historic portfolio of investee companies, which is usually available on their websites.

Examples of private equity firms that feature prominently in the Australian market include Quadrant Capital, Pacific Equity Partners, BGH Capital, CPE Capital, Anacacia Capital, The Carlyle Group and KKR.

6. Individuals

There are always seasoned business owners and people looking to exit the workforce who are looking to buy a new business. These individuals are usually interested in smaller businesses that are within their capacity to fund.

As you start contemplating the sale of your business, it is well worth thinking about who the most likely buyers could be before starting the process. A comprehensive list of potential acquirers should be compiled, including the reasons for selecting them. Preparation is everything. Identifying interested parties early will allow you to implement strategic initiatives to maximise the appeal of your business to selected targets. In return, these initiatives will optimise your chances of achieving the highest possible price in a competitive tender process.

In most organisations, the business owner is probably the most competent person to identify the top candidates. They keep abreast of what is happening and know the various forces shaping the industry both domestically and internationally. Also, a savvy business owner would have a sound knowledge of the activities of their main competitors, customers, and suppliers. This depth of knowledge makes them ideally positioned to determine who would benefit most by acquiring their business. Professional M&A advisors will be able to help with the process and more importantly access their own domestic and international resources to complete the list with any names you have missed.

The challenge will be to find the time to consciously think about the various groups of potential buyers whilst continuing to run a successful business. However, it is well worth investing the effort to create a comprehensive and well thought-through list of potential acquirers as part of preparing your business for sale. At the end of the day, this might be the key to optimising the price you achieve.

Darren Shacknofsky, Head of Transaction Services, 2 December 2020