You will have a head start in selling your business if you can identify the most likely type of buyer in advance. By answering a few questions, a seller will be able to forecast the buyer’s probable financing needs and priorities. Questions include:
- Will the buyer have industry experience?
- Will he be a first-time buyer?
- Will the buyer need financing?
Different Types of Buyers
Even though, like all people, every buyer is different and unique, there are a few established categories of potential buyers. Some of the common types are described below.
1. Corporate Executive
70% of potential buyers for small businesses are first-time buyers. Many of them come out of corporate America. This type of buyer is usually a victim of corporate downsizing or has opted out of the corporate rat race. He generally will need some type of financing.
Geography is sometimes important to a displaced executive. He will typically own a home and be unwilling to relocate, since the financial benefits seldom justify relocation. He wants to replace his lost salary with a similar income. He will often have a short timeframe to choose a business. Essentially, the corporate executive is looking to “buy a job” and a small business affords him that opportunity. This type of buyer usually has a professional resume, college degree, and good credit, making him a candidate for SBA financing which will afford a seller the maximum amount of cash at closing.
On the other hand, buyers who are still employed in corporate America are rarely in a position to make a quick decision. He is often waiting to uncover the business of his dreams before deciding if he is really going to give entrepreneurism a try. Be cautious with a corporate buyer. He may be a dreamer rather than a doer.
There can be advantages to selling to a competitor or vendor. The decision process, due diligence period, and training after closing the sale can all be shortened since the acquiring company knows the market and the industry.
Due to confidentiality, competitors/vendors should be approached with caution. With all due respect to signed confidentiality agreements, you should keep your cards close to your vest regarding company information if you talk to a vendor or competitor.
3. Existing Employee
Sometimes a current employee can be a viable, possible buyer. When selling to an employee, an owner will sometimes provide owner financing or working capital. If the new employee-turned-owner runs into financial hardship, the seller may find himself in a tough situation.
4. Investment Group
Investment groups are always looking for a good deal. These potential buyers are interested in a superior investment and strong management infrastructure. An investment group often has no interest in running the business and is only interested in the cash flow. In this situation, the seller may be in good position to stay on as a manager while receiving an income stream from the sale.