The Logical Buyer for Your Small Business

You can waste a lot of time fishing in the wrong spots. So unless you have plenty of time to waste, don’t start casting your bait until you have a good idea where the fish are biting.

When fishing for a buyer of your business, the first question you must answer is what kind of buyer is likely to be interested. If you go after the wrong type, you’ll go hungry.

A very common mistake that owners of smaller private businesses make is failing to understand that the buyer most likely will be an individual. Moreover, it will be an individual who already lives in their geographic area.

This is because the two other buyer types – private equity groups and industry players (i.e., other companies within your industry) – rarely buy businesses with less than $500,000 in annual profit. Yes, that’s annual profit. As in the bottom line.

So if your company earns less than this, your buyer is almost certainly going to be an individual. This is not necessarily great news, but it is reality.

Individual buyers can be more trouble than private equity groups, which are basically organizations or groups of people that make money by buying, growing and selling businesses. They can also be more difficult to deal with than companies in or around your industry. Here are the main reasons:

Individual buyers tend to buy businesses near where they live, so finding them involves engaging people in your community. But most business owners want to keep the project “on the down low.” It’s one reason why many business sellers spend time and energy, futilely in most cases, courting out-of-town private equity groups and industry players.

Individual buyers tend to be fickle and emotional. Why?

• They typically have little or no experience buying a business.
• They often don’t have the money they’ll need to get the deal done.
• Even when they do have the money, they’re usually uneasy about possibly losing it by putting it in a private business they know little about.

Individual buyers tend to take a lot longer (than private equity groups and industry players) and need a lot more hand-holding because they tend to be inexperienced at buying companies. It also gets back to the fact that they’re scared about losing their own money or they’re trying to figure out where to get the money.

Individual buyers tend to have a limited amount of money, which means they tend to need higher levels of seller financing. They are often unable to come up with enough of their own cash and bank financing to pay the full price of the business. Where will the balance come from? Well, if a deal is going to get done, it’ll have to come in the form of seller financing (i.e., a loan from the seller that is subordinate to the bank loan).

Individual buyers are hard to identify. That is, their names aren’t all listed somewhere so we can easily locate them. These people are lying low in jobs here and there, maybe unemployed or semi-retired, sometimes telling people what they really want to do (i.e. buy a business), sometimes not. So locating them is hard. In fact, the trick is to help them find you. This entails spreading the word broadly. Getting the word out in the community and hoping it reaches the right people. This can be done quasi-confidentially by using a generic summary of the business. Even so, maintaining confidentiality will be a serious challenge. Other ways to find individual buyers include listing the opportunity on business buy-sell websites; running ads in local newspapers; informing professional service firms such as staffing, law firms and accounting firms; and hiring a local business broker.

As with most things in life, we do a lot better if we face the facts, even when the facts are inconvenient or burdensome. For business sellers, the simple fact is that smaller businesses almost always sell to individuals. As a business’ annual profits rise over $500,000, industry players (companies) in the geographic area will start to enter the arena. As annual profits rise over $1 million, private equity groups also may begin to become a possibility. So if you own a businesses that is below these thresholds, devise a plan that will get you what you want – a sale in a reasonable amount of time and for the highest price. For most small companies, the buyer will be an individual.