The Complete Guide to Selling a Business: Options and Exit Strategies

Selling a business

Selling a business is a long and complex process. You may be ready to sell this year or just curious into what it will take to sell – this series will help. The business sale process can be broken down into core stages – from who you need to hire, to what questions you should be prepared to answer, to how to hand off your company once you’ve signed on the dotted line.

In this post, you will learn how to build an effective team to support the sale, because when it’s time to sell your business, don’t go it alone.

Stage 3: Defining Potential Options and Exit Strategies

When considering the sale of a business, there are potentially a wide variety of transaction options. Look to your M&A advisor or broker to introduce you to the range of transaction options that make sense for your business.

Three important initial questions you should ask yourself before selling your company are:

• Whether to sell to a strategic buyer or a financial buyer
• Whether or not you would want to stay with the company once it’s under new ownership, and
• Whether right now is the right time to sell your business.

You should also understand the 5 differences between strategic and financial buyers.

5 Differences Between Strategic and Financial Buyers

Understanding the key differences between strategic and financial buyers can help you understand their decision-making processes as your approach the sales process.

Strategic buyers are operating companies that provide products and/or services and are often competitors, suppliers, or customers of your firm. They can also be unrelated to your company buy looking to grow in your market to diversify their revenue sources. Their goal is to identify companies whose products or services can synergistically integrate with their existing P/L to create ncremental long-term shareholder value.

Financial buyers include private equity firms (also known as “financial sponsors”), venture capital firms, hedge fund, family investment offices, and ultra-high net worth individuals. These firms and executives are in the business of making investments in companies and realizing a return on their investments. Their goal is to identify private companies with attractive future growth opportunities and durable competitive advantages, invest capital, and realize a return on their investment with a sale or an IPO.

These two different types of buyers also approach the sale process in many different ways. Here are 5 key differences.

1. Evaluation of your business

Strategic buyers evaluate acquisitions largely in the context of how the business with “tie in” with their existing company and business units. Financial buyers won’t be integrating your business into a larger company, so they generally evaluate an opportunity as a stand-alone entity. In addition, they often buy business partially with debt, which causes them to scrutinize  the business’ capacity to generate cash flow to service a debt load.

While both buyer groups will carefully evaluate your business, strategic buyers focus heavily on synergies and integration capabilities whereas financial buyers look at standalone cash-generating capability and the capacity for earnings growth.

2. Familiarity with your industry

Strategic buyers usually are more up to speed on your industry’s competitive landscape and current trends. As such, they will spend less time deciding on the attractiveness of the overall industry and more time on how your business fits in with their corporate strategy.

Conversely, financial buyers are typically going to spend a lot of time building a comprehensive macro view of the industry and a micro view of your company within the industry. Financial buyers might ultimately determine they do not want to invest in any company in a given industry. Presumably, this risk is not present with a strategic buyer if they are already operating in the industry.

3. Strength of back-office infrastructure

Strategic buyers are going to focus less on the strength of the target company’s existing “back-office” infrastructure (IT,HR, Payables, Legal, etc.) as these functions will often be eliminated during the post-transaction integration phase. Financial buyers will need this back-end infrastructure to endure, they will scrutinize it during the due diligence process and often seek to strengthen the infrastructure post-acquisition.

Therefore, you’ll like want to de-emphasize the importance and/or value of your back-office infrastructure in discussions with a strategic buyer, whereas it’s important to be prepared for thorough evaluation of these functions when having discussions with a financial buyer.

4. Investment horizon

Strategic buyers intend to own an acquired business indefinitely, often fully integrating the company into their existing business. Financial buyers typically have an investment time horizon for four to seven years. When they acquire and subsequently exit the business, especially in the context of the overall business cycle, will have an important impact on the return on their invested capital.

5. Transaction efficiency

Financial buyers are in the business of making acquisitions. It is one of their core competencies to execute deals in a timely fashion. Strategic buyers may not have a dedicated M&A team, may be encumbered by slow-moving boards of directors, bureaucratic committees, territorial division managers, necessity to check acquisition against internal projects and so forth.

Portions of this blog were taken from Axial Forum