Financial buyers and Strategic Buyers

                                                                                         

Financial buyers can carry several disadvantages:

1. Little interest in improving the business. They often leave businesses unimproved, since they may intend to resell the company later. Also, they may not grant you access to their superior resources (such as better marketing and sales staff).

2. Financial pressure. The buyer will focus on increasing cash flow to pay off the debt they acquired to purchase your business.

3. Deal-making focus. They may sell your business again soon after buying, which means additional turmoil for your employees and clients.

On the other hand, strategic buyers do expect to complement your business with their sales, product and support staff. They may not pay a premium because they know the market better than a financial buyer. They often look for acquisitions that support their strategic plans. However, the seller may not have as great a role in decisions and operations – particularly if your goals are different from theirs.

Whichever type of buyer you attract, you can be sure that financial statements will be the most important part of their decision. Audited statements are preferred by buyers and their bankers. When the buyer examines your statements closely, you'll find that audited statements help the buyer reduce his risk. This will attract more potential partners, thus strengthening your negotiating position.

Don't try to sidestep audit costs by simply having an accountant review your financials. That's better than no review at all, but it's still not as good as an audited statement. If you have inventory, you may also need retroactive audited statements.

Aside from financials, demonstrate the depth of your management team. There is less risk (and thus more value) when there is a team of managers supporting the owner.

Also, concentrate on what you do best. Drop weak product lines and focus on your core competencies. If you are diversified, break down financials by product line or service provided to help them determine which lines are strongest. Similarly, drop assets (such as undeveloped land) that do not add to the bottom line earnings.
Consider whether to offer the buyer your business, or simply its assets and liabilities. The tax laws favor buyers when they only buy assets, but this usually means the seller will pay more taxes afterwards. Have your accountant document the differences.

If you use an intermediary such as a broker, they will prepare “books” (formally known as “selling memoranda”) which present data about your company and why it is a good acquisition. You will generally find it better to do a business plan of your own and present your own financial projections. Advantages include:

• Always a sound management technique, regardless of your possible intentions to sell.
• No indication to buyers how long you've been on the market.
• No tip-off to employees that the business is for sale.
• No urgency conveyed for a sale.
• No outside broker pressure to rush into a deal.

Buyers and brokers can become bothersome, constantly calling owners to convince them to “at least talk about” selling. Brokers may be “fishing” for leads without any real buyers on board. Or they may represent several buyers and work on a contingency. Also, a broker may claim to represent a high-profile buyer, then delivers only substandard speculators.

If a broker writes with specifics about a buyer's interest, it may be worth following through to get details – but make it clear you're not currently interested in selling. Make sure you've thought through all the consequences better you agree to work with a broker. Don't get locked into one broker and one buyer's schedule: having your choice of multiple opportunities gives you much more power.

Be sure you've anticipated the fallout in case a deal does fall through. Early in the process, the risk is low and confidentiality easy to maintain. Once there is a letter of intent, you'll have to back away from other offers. And once the would-be buyer begins due diligence, your employees are bound to find out. Due diligence can cause disruptions for weeks, and even then, there's no guarantee the letter of intent will lead to a sale. In fact, many deals stall or are overhauled at this point. A bad outcome at this point often reflects badly on your firm to clients, competitors, staff and other potential buyers.

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