Starting a business takes a single-minded focus, intense planning, hard work and more than a little luck. And when all is said and done, all of this may be the easy part.
Keeping a business going over the long term is a constant challenge that tends to keep an owner focused on the here and now, sometimes at the expense of thinking very far into the future. And for most business owners, the future includes a day when they sell the company they founded.
That’s why it’s worth understanding the different types of buyers you might encounter in the process of selling your business — and weighing the pros and cons of each to see what arrangement makes the most sense for you.
Different types of buyers
Buyers can be grouped into two categories: financial and strategic. Let’s quickly break them down.
Financial buyers will often be venture capital or private equity firms that are viewing your business as an investment. They’re looking at your financial statements and comparing you against your competitors. They’ll pull the trigger if they believe there’s a clear path to get their money back with a return when your business sells the next time. They expect to put money in and get money back after about five years.
A strategic buyer, on the other hand, is often another business — perhaps a customer or competitor, or a company in a related industry that sees an advantage in acquiring your business. They might want to expand their operations or improve their product catalog. They’re trying to put the necessary pieces together to help their own business prosper, and they see you as one of those pieces.
In contrast with a financial buyer, the future success of your business as a business may not be important to a strategic buyer at all. Sometimes they only need parts of the operation. Or they might even want to purchase your business with the purpose of shutting it down, to eliminate a competitor. Their time frame is usually forever.
Different buyers, different outcomes
As a business owner, each type of selling situation presents unique challenges and rewards. And depending on what you envision for your future career, you may find one type of situation more appealing than the other.
With a financial buyer, you’re getting a new partner. With a strategic buyer, you’re either getting a new boss or getting fired. If you have an independent streak—not an uncommon trait among business owners—you may chafe at the prospect of having to answer to someone else. In other words, some soul-searching may be required.
A financial buyer is likely to offer you less money initially, with the prospect of a significant payday down the road. You enter into an ongoing relationship where you make decisions together and work toward hitting specific benchmarks.
Because a strategic buyer has a clear idea of what they want from your business, and will likely be looking at the combined results of your business and theirs, by definition they should be able to pay more.
However, you should be prepared to be unemployed as part of that deal. A strategic buyer would decide your future with the business you started, so you could continue working there indefinitely, not at all, or any length in between. Having to answer to a new boss after years of being the boss may take some getting used to.
How to find the right type of buyer for your business
Obviously, each business owner has a unique situation and set of considerations. Many owners seek the services of M&A advisors to assist them with weighing the consequences of each scenario and making this crucial decision. But in the end, only you know what’s the best choice for you and your business.