There is a reason it is called exit planning – there are steps required for you to ultimately leave the company you have built. One-step is to understand who will be on the other side of the negotiation table in a potential transaction.
In most cases, there are five types of buyers in the market place and it is important to understand the motivations and priorities of each when exit planning.
- The Strategic Buyer. Companies that are looking to expand into a new market or leverage your existing customer list for higher revenue growth are referred to as ‘strategic buyers’. The main advantage of selling to a strategic buyer is that your company could receive a higher purchase price because strategics will often pay a premium for businesses that fit into their existing business model or delivery platform. Higher purchase prices come at a cost because buyers will cut all redundant expenses. This will risk the jobs of your employees.
- Private Equity. Private equity groups (“PEG”) buy for financial reasons. The PEG will look to maximize their return on investment two ways. First, with a purchase price that is below a market price in order to increase their returns (similar to a discount on a bond when interest rates are in a rising environment) and second, bring in financial and operating expertise in order to take your company’s operations to the next level. Again, this exit plan comes at a cost. The PEG only sees a return on their investment once your company is bought and sold. So many decisions made by the PEG is for short-term profitability in order to flip the company at a profit to another potential buyer.
- Holding Companies. Holding companies are similar to PEGs in that they are financial buyers. In most cases, the holding company is looking for a control stake in your company (greater than 51 percent) and wants to see steady revenue growth and steady dividend payments. Holding companies are long-term investors seeking the selling management team to remain in place to operate the company.
- Individual Buying a ‘Job’. This is common for smaller companies, defined as total pre-tax profits of $250,000 and below. This buyer will analyze the cash flow ability of the Company and match it to his personal needs. The buyer wants to know how secure the revenue is and can the customers be transitioned to him without a downturn in cash flow.
- Your Employees. Lastly, you employees may want to purchase the company from you. In that case, an employee-stock ownership plan (“ESOP”) will gradually transfer ownership from the ESOP Trust to the employees. Current ownership sells its equity stake in a leveraged ESOP transaction to an ESOP Trust and the ESOP Trust manages the movement of equity from Trust to the employees.
If you are one of the millions of Baby Boomers with a business that is your largest asset, please use the information above to your advantage for your exit planning.
Mike Metzler, CPA/ABV, CMA, CGMA, ASA