Types of Business Buyers

Most business owners think that there is one value their business can sell for. The truth is, depending on who you sell your business to, different types of buyers are willing to pay dramatically different prices for your business. Having an understanding of different buyer types will assist you when it is time for you to sell your business.

1. Individual buyer
This is typically an individual with substantial financial resources, and with the type of background or experience necessary for leading a particular operation. The individual buyer usually seeks a business that is financially healthy, indicating a sound return on the investment of both money and time. The individual buyer will hit a strong bottom line when it comes to price. Therefore, these buyers will usually limit themselves to transactions involving less than $1 million cash.

2. Strategic buyer
This buyer is almost always a company, having as its goal entering new markets, increasing market share, gaining new technology, or eliminating some element of competition. In essence, it is part of this buyer's “strategy” (hence the name) to acquire other businesses as part of a long-term plan. Strategic buyers can be either in the same business as the company under consideration, or a competitor.

3. Synergistic buyer
Synergy means that the joining of the two companies will produce more, or be worth more than just the sum of their parts. Example: A large real estate company purchases a mortgage company. It can now use its existing customers (those who buy homes) and offer them the mortgage funds to finance their purchases.

4. Industry buyer
Sometimes known as “the buyer of last resort”, this type is often a competitor or a highly similar operation. This buyer already knows the industry well and, therefore, does not want to pay for the expertise and knowledge of the seller. These buyers will pay for assets (but probably not what the seller thinks they are worth); they will not pay for goodwill, covenants not to compete, or consulting agreements with the seller.

5. Financial buyer
Financial buyers are influenced by a demonstrated return on investment, coupled with their ability to get financing on as large a portion of the purchase price as possible. Working on the theory that debt is the lowest cost of capital, these buyers purchase businesses with the sole purpose of making the maximum amount of money with the least amount of their capital invested.

For business owners considering the sale of their business, advice should be sought from a business broker who understands the different types of buyers. The relative sizes of acquisitions by different buyer types (compressed into their broader categories), is shown in the accompanying chart (keep in mind that all figures are approximate):