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Sale to a Financial Buyer

In previous posts on the topic of succession planning, we highlighted transition options available to business owners looking to sell their business. These links can be found below.

This article will discuss what a financial buyer is and the advantages and disadvantages of selling to this type of buyer.

Financial buyers are investors who acquire businesses with the intention of generating a return on their investment, either through increasing the profitability of the business and/or eventually selling the business in the future for a profit. They target businesses with strong growth potential and competitive advantages, and attempt to acquire businesses at bargain prices. Examples of financial buyers include high net worth individuals, venture capitalists, private equity firms, and family investment offices.

Advantages of Selling to a Financial Buyer

  • Seller Involvement Post-Transaction: Financial buyers are investors, not operators. Therefore, if a seller and current management are interested in remaining involved with the operations of a business, financial buyers will typically provide them the ability to do so. This helps to ensure a successful transition.
  • Less Disruption to the Business: A financial buyer is less likely to disrupt the operations of the business, thus mitigating the impact on customer and employee morale.
  • Not Selling to a Competitor: When selling to a strategic buyer, a business runs the risk of revealing information to a competitor or other industry participant if the transaction does not close. Selling to a financial buyer will reduce the risk of potential trade secrets leaking to a rival, while allowing the owner to “cash-out” and remain involved with operations.

Disadvantages of Selling to a Financial Buyer

  • Lower Selling Price: Financial buyers purchase businesses to generate a return on investment without synergies or particular strategic rationale. Therefore, they may offer prices that are lower than strategic purchasers, as they want to buy businesses as inexpensively, usually with the intention of “flipping” the business after a reasonable time frame post-acquisition.
  • Seller Involvement Post-Transaction: Financial buyers lack in-depth expertise in the industry. Therefore, the seller’s continual participation in the business is typically mandatory for several years post-acquisition. If a seller wishes to remove themselves from the business completely and retire, selling to a financial buyer may not be a viable choice.
  • Payment: Financial buyers generally use debt to finance the majority of the acquisition. Financial leverage reduces the financial flexibility of the company, and the seller may receive other forms of payment such as a note receivable or payment based on future earnings of the business, which increases the overall risk for the seller.
  • Due Diligence: Transactions with financial buyers take longer to close and due diligence is more extensive as they may lack an understanding of the industry the business operates in, and other stakeholders with additional requirements, such as lenders may also be involved.
  • Lack of Long-term Vision: If a seller is concerned about the long-term future of their business, and the careers of its employees, partnering with a financial buyer may not be the best option. Even before acquiring the business, a financial buyer may be considering an exit plan that does not necessarily align with the long-term viability of the business.

Sellers of businesses must understand the motives of each type of buyer, and the first step is to identify the type of buyer with whom you are transacting. Financial purchasers are more concerned with a potential return on investment. As a result, they place greater emphasis on the financial fundamentals of a business, such as cash flows, net assets, and potential cost savings.

GG Observations: At Grewal Guyatt LLP, our team of experienced professionals can assist you with selling your business by providing valuation advisory, tax planning, and other support services to maximize your proceeds when selling your company. Obtaining the services of an experienced advisor will provide you comfort and allow you to make an informed decision regarding the sale of your business. Do not hesitate to reach out for more information. 

Succession Planning – Succession Planning Article

Business Transition to a Family Member – Business Transition to a Family Member

Sale to a Strategic Buyer – Sale to a Strategic Buyer

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Authors

Nick Rotundo

Director

Nick Rotundo

CPA, CA, CBV

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