Options for Exit: How to Choose the Right Buyer for Your Business

Only 20 to 30% of transitions nationwide are successful. This means one of the first questions you’ll need to ask is: Who is going to buy my business? If you haven’t put careful consideration into exit planning, this question may not be easy to answer.

What’s Important to Potential Buyers?

To prepare for a transition, you must flip your perspective and put yourself in a buyer’s shoes.

The Exit Planning Institute reports a common transition issue being that when an owner is ready to start thinking about exiting, they realize they have not allowed themselves enough time to position their businesses for transition, minimize taxes, and maximize net proceeds.

In large, adapting your business to buyers’ preferences involves formalizing and professionalizing your business — clearly defining roles, understanding margin drivers, and investing in people, processes, and technology. Most buyers want a business, not a job. If you are a significant part of what makes the business run, it’s important to start thinking about ways to offload and delegate.

Common attributes that align with buyer values include:

• A formalized management team.
• Investment in ERP systems and modern processes.
• Operational practices based on the buyer-preferred accrual basis mindset.
• Contracts that include documentation guaranteeing transferability.
• A monthly financial package for review and an efficient monthly closing process.
• Established key performance indicators (KPIs) and well-thought-out forecasts to measure performance from a financial perspective.

Other preferences will vary by industry. For instance, in the manufacturing industry, buyers want inventory availability and supply chain security to ensure they can continue the manufacturing process. They’re also drawn to achievable growth forecasts supported by supply chain and inventory capabilities. On the other hand, service and contract-based industries look for revenue recognition for contractors and signed and transferrable contracts.

Understanding the Different Types of Buyers

Business buyers generally fall into two categories: strategic and financial. Knowing the characteristics, motivations, and implications of each can help you decide on which to pursue.

Strategic Buyers

• Family Members: Family succession remains one of the most traditional forms of business transition. However, proper estate planning, valuation, and governance structures are necessary to mitigate familial conflicts and ensure the company’s continuity.
• Outside Party: This could include competitors, suppliers, other external businesses — even customers. These buyers often have specific goals, like market expansion or diversification.

Opting for a strategic buyer offers several advantages. They often share existing business objectives, potentially leading to smoother transitions and higher purchase prices. Strategic buyers also typically buy 100% of the business and assume all responsibility.

However, there are potential downsides, such as substantial changes to the company and complex due diligence.

Financial Buyers

• Employees: Employee Stock Ownership Plans (ESOPs) are an effective way to ensure continuity into the next phase of your business journey. With ESOPs, you can confidently leave a lasting legacy, optimize taxes, and maintain your company's core operations. Employee ownership is also a powerful tool for attracting and retaining employees, providing long-term wealth-building opportunities, and cultivating a high-involvement work culture where employees act as stakeholders. ESOPs also offer the potential for a gradual transition that gives you control over the timeline and successors.
• Private Equity Groups: Private equity buyers aim for a high return on investment, typically through increasing operational efficiencies. They may bring new management into the company and reshape its strategy, focusing on long-term growth before an eventual exit. Each group generally has certain industries and company sizes they like to invest in.
• Venture Capital Firms: Targeting high-growth, scalable companies, venture capital firms inject capital with the expectation of substantial future returns. While they offer financial leverage, they usually seek managerial influence, often via board representation.
• Family Offices: Tailored to manage wealth for high-net-worth families, these entities often seek stable, long-term investments. Family offices control their wealth and are not required to work with other investors, allowing quicker decision-making and more flexibility concerning investment timelines.

Financial buyers bring financial expertise and networks, potentially driving growth and expansion. However, they often maintain a hands-off approach to daily operations, which may not align with your long-term vision. Additionally, financial buyers may prioritize profitability and cost-cutting measures, potentially impacting the existing corporate culture.

Key Considerations When Selecting the Buyer for Your Business

You’ve worked hard to build your business, and you want to make sure the next owner will carry on the legacy you’ve achieved.

While price is undoubtedly an important consideration when selling your business, it’s not the only factor.

When analyzing your exit options, ask yourself the following:

Does this buyer align with the company’s culture?

A company’s culture is its lifeblood, shaping daily interactions, employee morale, and customer perception. Ensuring a cultural fit between your business and the prospective buyer is essential. A mismatch can lead to turnover, reduced productivity, and a dilution of the brand you’ve worked hard to build.

Do we share the same goals for the business?

76% of owners profoundly regretted selling their business within the first year. To avoid seller’s remorse, ensure that your strategic objectives align with the buyer’s. Are you both looking for sustainable long-term growth or is the focus on quick profitability? A clear understanding of what each party aims to achieve post-transaction will set the stage for a successful transition.

What will my involvement be after the sale?

How do you want to interact with the business after the sale? Will you remain involved in an advisory role, or do you plan on exiting completely? This decision can affect the sale terms and your choice of buyer. Strategic buyers might want you to stay on during the transition, whereas financial buyers could prefer otherwise. Establish your desired level of involvement upfront to identify the most suitable buyer.

How will my employees and customers react?

An ownership change can significantly impact your employees and your customers. A new owner could mean changes in benefits, work culture, or even layoffs. They may also bring a different approach to customer relationship management. Customers with solid relationships with the previous owner may need to adapt to new ways of working with the business.

Proactive Exit Planning Ensures a Successful Transition

Regardless of the unique paths to success business owners pursue, one common thread unites them all: the need to eventually transition the company to its next owner. But when the time comes to sell, there are no guarantees that a potential buyer will share the same vision for your business as it stands today. Through strategic and thoughtful exit planning, you're not just safeguarding your future — you’re actively shaping it and increasing the likelihood of a smooth and successful transition.