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Is your Business for Sale? Here’s a List of Bad Buyers.

by on
in The Business of Business Finance

Question: What makes a bad buyer?

Answer:
  • Someone who can not or will not pay full value (or higher) for your business
  • Someone who will require an earn out that is unrealistic, someone who pays very little up front cash
  • Someone who wants to use your future earnings to pay for your company.  
Perhaps your bad buyer is someone who wants to use their private, illiquid stock for a bulk of the purchase price. There are many variations of the bad buyer, unfortunately, there are many more bad than good buyers, especially in today’s market.
caution
The challenge, of course, when selling your business is that you will not be able to identify these deal restrictions until you get to the “LOI phase” which is when an interested buyer will submit an Letter of Intent or Letter of Interest.

Unfortunately, the LOI phase will come months after you have begun the process of selling your business. With that in mind, here are a few early indicators of who is probably NOT a good buyer of your business.

1) The Icons: Google, Microsoft, IBM, Cisco, et al

When the icons of your industry make an acquisition it makes the news and it seems like they are constantly acquiring companies “similar to yours.” They are not, and there is a very small chance they will be a good buyer for your business. A good buyer is defined as someone who will pay full (or higher) value for your company. Here is a rule of thumb that can be your guide during the process of selling your business: The most likely buyer will have annual revenues 5x – 20x larger than yours. So, if your annual revenues are $10 million, the most likely buyer will have revenues of $50 - $200 million. They are also slightly more likely to be a public company than private enterprise.

2) The largest industry player

There is a rule when acquiring companies that states there is as much work and due diligence to buy a $5 million company as a $50 million. However, you’ll need to buy 10 $5 million dollar businesses to have the same impact to your revenues. For the largest players in your industry, they simply can not afford to be distracted with such a small transaction (less than 5% of their revenue).

3) Your customer

Remember, they are your customer for a reason. If they really like or want your technology, expertise, client base, etc., you would already know about it. When you begin to identify prospects to buy your company, you can probably leave your current customers off the list.

 4) Your competitor

Remember our definition of a Good Buyer above. Competitors are very seldom a good buyer of your business because there is so much overlap in capability, clients, contacts, suppliers, etc. It is highly likely that a competitor will make an offer that reflects full value for your company. Additionally, exposing all your internal secrets to a competitor during the due diligence phase is sure to make you very uncomfortable. In truth, there is no simple well to sell a business. Like most things in life and business, finding a good buyer for your company will most likely require that your team contact 100+ potential buyers, spend hours discussing the company strengths and “positioning” your company weaknesses and pushing properly to get a good offer from a well qualified buyer.

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