When owners start thinking about selling, one of the first questions they ask is who should handle the sale. A business broker? An investment banking firm? The answer usually becomes clear once you answer an earlier question: who is likely to buy your company?
The pool of buyers a seller is trying to reach dictates how the company should be marketed. How it is marketed, in turn, determines which kind of advisor is the right fit. Get the order right and the choice of advisor largely makes itself.
Two pools of buyers
There are both internal and external potential buyers of companies. Internal buyers include family members and members of the existing management team. Those sales follow their own path, so this article focuses on the external market.
In our experience, external buyers of privately held companies fall into two broad groups: individual owner-operators and professional buyers. The two groups buy for different reasons, look for different things and are reached in different ways.
Individual owner-operators
People who buy a company so they can run it themselves.
- Usually finance the purchase with an SBA loan
- Step in as owner and day-to-day manager
- Typically found locally or regionally
- The natural buyers for smaller, owner-run companies
Professional buyers
Companies and investors that buy businesses as strategic moves or as investments.
Companies expanding horizontally or vertically, looking for synergies that improve their own operations.
Investors that buy companies, build their value and expect to earn a return when they exit.
Professional buyers are selective
Strategic acquirers and private equity firms evaluate a large number of opportunities, so they tend to be disciplined about where they spend their time. Most have a clear set of criteria, and if a company doesn’t meet them, they will usually pass rather than take part in a sale process. While every buyer is different, the qualities below come up again and again.
Can the business function without the owner? Do customers and vendors see themselves dealing with the company, or with you?
Audited or reviewed financials with one-time expenses identified, regular forecasting, and written policies and procedures.
A broad customer base and no reliance on a single customer, vendor or employee.
Income that is locked in month to month, rather than starting from zero at the beginning of each month.
Proprietary products or services that are hard to replicate, with high switching costs for customers.
A detailed growth plan, and ways of delivering the product or service that can scale with it.
The first, anchor acquisition a private equity firm makes in an industry. It is an established business with the management and systems to serve as a foundation, and the firm builds on it by acquiring other companies and folding them in.
EBITDA
A common minimum for a private equity platform company, along with strong management, a leading position in its industry and well-defined systems.
Once private equity owns a platform, it often grows by buying smaller companies to add to it. Strategic acquirers do the same.
Bolt-on: the smaller company keeps its name and identity, adding customers, products, geographies or intellectual property.
Tuck-in: the smaller company is absorbed completely and becomes part of the buyer.
“It is easier to sell a business than it is to sell a job.”
The buyers decide the marketing, and the marketing decides the advisor
Reaching individual operators means broad exposure: listing the company where those buyers are looking, with an asking price. Reaching professional buyers means a targeted, confidential approach to a researched list of strategic and financial buyers, with competition among them setting the price. Those are two different jobs, and they call for two different kinds of advisor.
Who will buy it?
Individual operators, or professional buyers.
How should it be marketed?
A public listing with an asking price, or targeted outreach and a competitive process.
Who should run the sale?
A business broker, or an investment banking firm.
Business brokers and investment bankers
Both help owners sell companies, but they work in very different ways.
| Compare | Usually best for smaller companiesBusiness broker | Usually best for larger companiesInvestment banker |
|---|---|---|
| Typical company | Smaller, often owner-run; generally under $1 million of EBITDA | Larger, with management that runs the business independently of the owner |
| Typical buyer | Individual buyers | Strategic acquirers and private equity |
| Buyer reach | Mostly local and regional | Local, regional, national and global |
| How it’s marketed | Listed publicly on sale platforms, then wait for offers | Selective, targeted outreach to researched buyers |
| How price is set | A listing price, like a house | A competitive auction: buyers submit value indications and competition drives value |
| Valuation approach | Simple metrics such as sales and profits | Also weighs intellectual property, growth potential and value drivers that appeal to specific buyers |
| Deal options | Best for straightforward sales of 100% of the company | Generally sales of 100% of the company, but can also handle partial sales, management buyouts and other structures |
| Advice | Limited analysis and consulting; help getting to close | Extensive market research, proactive buyer outreach and strong negotiation |
Neither is better in the abstract. A good broker is the right choice for many smaller companies, and an investment banker’s process would be wasted on a company that professional buyers won’t consider.
Size usually decides
In practice, the choice tends to break on size. Smaller companies, especially those that depend heavily on the owner, are often best served by a broker who can reach individual buyers. Larger companies that meet professional buyers’ criteria generally do better in a competitive auction run by an investment banking firm.
The hidden cost of a listing price
A broker markets a company much the way a real estate agent markets a house: on marketing platforms with an asking price. That approach is simple and transparent, and it’s how individual buyers expect to shop. The trade-off is that the seller sets the ceiling before the market has a chance to speak.
The seller names the price.
Offers come in at or below the asking price. If a buyer would have paid more, you are unlikely to find out.
The buyers name the price.
Qualified buyers submit indications of value and letters of intent, and competition among them pushes the price toward what the market will truly bear.
For a company that professional buyers want, putting a price on it can leave money on the table, money that a competitive process might have uncovered.
Which buyers will your company attract?
A few questions give a quick first read.
- Is your EBITDA approaching or above $1 million?
- Could the business run for a month without you?
- Are your financials reviewed or audited, with one-time expenses identified?
- Could you lose any single customer, vendor or employee without serious damage?
- Is a meaningful share of your revenue recurring?
- Do you have a written plan for growth?
If you answered yes to most of these, professional buyers are likely in your market, and a competitive process could pay off. If not, you have two good options: work with a broker to reach individual buyers, or spend time building the qualities that bring professional buyers to the table. Our Grow Enterprise Value page explains how we help owners do that.
How we can help
Through Windward Advisors, we run competitive sale processes that bring strategic and financial buyers to the table. Through Cornerstone Valuation, we can estimate what your company might bring in a negotiated transaction, using the standard we call Marketable Transaction Value.
Either way, the first step is a candid conversation about which buyers your company will attract and which path will get you the best result.