If you’re a small business owner, chances are you’re not only focused on growth, but also thinking about your business exit strategy and finding a business buyer. After all, even the most passionate entrepreneur eventually wants to retire or move on to new ventures. But in order for a sale to go smoothly, you need to be prepared—and that means finding the perfect buyer for your business.
It’s critical to begin with the end in mind and create your exit plan far in advance of selling. In fact, I think the best entrepreneurs start planning their exit strategy the day they first open their doors.
You don’t want to wait until you’re contacted by a prospective buyer who’s interested in your business – at that point, it may be too late to get the best possible price for your company.
My goal with this post is to help you be proactive and think through these items in advance to make sure you’re ready when the time is right. Let’s make sure your hard word and sweat pays off and that you’re able to cash out the value you deserve.
In this post, you’ll learn about the difference between strategic and financial buyers, the various types of strategic acquirers out there, and exactly how to come with a huge list of of potential buyers.
Strategic Buyer vs. Financial Buyer: Which is Right for You?
When you’re ready to sell your business, it’s of course important to find the right buyer. But what kind of buyer is the right one for your business? There are two main types of buyers: strategic and financial.
Each type of buyer has different motivations and objectives. As a result, they’ll likely approach the sale very differently. It’s important to understand the difference between the two types of buyers so you can choose the one best suited for your unique situation.
A strategic buyer is usually a company that’s in the same industry as the business being sold.
A strategic buyer is a company that acquires another company primarily in order to expand its own capabilities. They’re likely interested in buying the business for reasons like:
- Expanding their operations into new markets
- Growing their customer base
- Gaining access to new technology or products
In other words, a strategic buyer is not just any company interested in acquiring your business; it’s a company that stands to gain something significant from the acquisition.
On the other hand, a financial buyer is usually an investment firm or venture capital firm. They’re oriented with a purely financial mindset – they’re interested in buying the business in order to make a profit by selling it later at a higher price.
So, which type of buyer is right for your business? It depends on a number of factors, including the current state of your business, your goals for the future, and the level of control you want to maintain after the sale.
If you want to ensure that your business continues to operate in a similar way after the sale, then a strategic buyer is likely your best option. Strategic buyers are typically more interested in the long-term potential of the business than in its current profitability. Often times they will be significantly larger than you and can create a significant revenue opportunity by leveraging your existing assets and capabilities.
Alternatively, if you’re looking for a quick sale at a high price, then a financial buyer may be a better choice.
It’s also important to consider the impact of the sale on your employees. If you sell to a strategic buyer, there’s a chance that your employees will be retained and may even have the opportunity to grow with the new company. However, if you sell to a financial buyer, it’s more likely that the business will be dismantled and sold off in parts, which could result in layoffs for your employees.
While there is no “perfect” answer, I typically recommend focusing on targeting strategic buyers, and that’s what we’ll focus on here. They are usually very well resourced and positioned well to maximize the long-term potential in your business, which translates to a bigger payday for you.
Types of Strategic Acquirers
We’re going to go through a process to uncover complementary businesses with strong adjacencies to your existing business.
The best type of strategic acquirer is a complementary business—in other words, a company whose products or services align very closely with yours. An example of this might be a software company that acquires a computer hardware company, or vice versa. The key here is that the two companies’ offerings work well together and create synergies when combined.
Here are some 8 questions I’d like you to think about:
Which companies sell to the same customers you do?
Think about companies that know your ideal customers intimately (direct and indirect competitors are a good place to start). Your business could be very appealing to them due to the potential upsell, downsell, or cross-selling opportunities.
Other examples of how this could benefit them: they can acquire new product capabilities, research and development, and gain significant market share all through acquiring your business.
Which companies can remove a bottleneck in your business?
If you wanted to 10X your business, what are your constraints to realistically get it done? Usually removing a couple major bottlenecks (i.e. improvements to operational infrastructure) can result in exponential growth. What is holding you back today? Think about which type of strategic buyer could help remove these constraints.
Which companies can earn more money than you can from your products / services?
Think about companies with the ability to rapidly scale your offerings into larger markets. Are there companies with a more extensive distribution network? A larger base of current customers?
Which companies could benefit from your technology or capabilities?
This type of acquisition can help to expand a companies technology capabilities and potentially tap into new markets.
Capabilities can include anything from customer lists, patents, inventions, trademarks, licensing to SOPs (standard operating procedures).
Which companies need the expertise of your employees?
Do your team members have deep subject expertise that would be valuable for other companies?
Which companies need your customer base?
The most obvious would be direct and indirect competitors, but this can be even more broad than that. Think about companies across different geographies as well as any substitute or replacement offerings (high end or low end) available in the market.
Which companies make money when you make money?
This is a company whose bottom line benefits when your company succeeds. This could include any suppliers or distributors you work with today.
An example of this might be a company that provides marketing services to small businesses acquiring another small business marketing firm.
Who has a problem you can fix?
Are there companies that are currently being held back with a specific problem you can solve? Often times larger companies will acquire that capability, because they’ve decided it’s easier to buy it compared to building it in house.
Biz Buyer Brainstorm
After going through that list, your brain should be buzzing with potential ideas.
At this point, I’d like you to spend some focused time capturing your thoughts on paper. Your goal should be to create an extensive list for each category. Don’t constrain yourself to your local market, as buyers can be all across the country.
Think of this process as a brainstorming exercise – we’re not aiming for perfection during this first pass. The goal is to have a brain dump which ultimately turns into a list of potential buyers.
Once you have your list, it’s time to do some initial research on each company. This will help you prioritize and focus your efforts as you move forward in the process.
Some factors to consider as you’re doing your research:
- The company’s size
- The company’s financials
- The company’s recent acquisitions
- Whether the company has a history of acquiring businesses in your industry
- What the company’s strategic priorities are
To get started, its often simplest to use Google and LinkedIn. Google is great for quickly finding basic information on a company. LinkedIn can be helpful for things like identifying key decision makers and understanding a company’s recent history.
You may also want to consider using a paid research service like Hoovers, ZoomInfo, or Crunchbase Pro. These services provide more in-depth information on companies, but are definitely more expensive.
Once you’ve done your initial research, it’s time to start reaching out to potential buyers. The best way to do this is by using your personal and professional networks. Ask around and see if anyone knows anyone at the companies on your list.
If you don’t have any connections, there are plenty of other ways to reach out (cold call, direct mail campaign etc.)
The most important thing is to be creative and resourceful. There’s no one-size-fits-all solution here. If you’re interested in more detail on this process, let me know in the comments. I’d be happy to create a separate post with a deep dive into outreach and next stages of the M&A process.
Conclusion
So there you have it—a quick overview of how to come up with strategic buyers for your small business.
As you can see, there are quite a few different types of strategic buyers out there—it’s just a matter of identifying which ones make the most sense for your particular business.
Remember, it’s important to start thinking about this early on in the game so you can be prepared when the time comes to sell.
You now have all the information you need to create a giant pool of potential strategic buyers for your business. Finding the right buyer is a process, and it may take some time. But if you do your research and put in the effort, you can find a great match and walk away with a lucrative payday.
Take this seriously and it will pay dividends later on.
Let me know how it goes for you – I’d love to hear about your progress in the comments.
Good luck!
