Identifying a Strategic Buyer for Your Firm

Q. If my ultimate exit strategy is to sell to a strategic buyer, what process would you recommend to identify potential strategic buyers for my small business with great growth potential given adequate resources, new distribution channels and a board of directors with industry-specific expertise?

A. We suggest three steps.

First, increase the number of prospective buyers. If your business isn’t already there, grow it into a fully evolved midsize structure. This means having a competent set of managers in place with well-documented processes and an appropriate set of metrics to let you know what is going on in bowels of the business without your having to be there personally. Then, delegate day-to-day decision-making authority to these managers and hold them accountable for results. The acid test for a fully evolved midsize business is that the principal can leave for a couple of months and not much changes. Obviously, strategic decisions won’t be made in your absence, but the normal work of the business will go on without a glitch.

This structure will make your business attractive to buyers who are not able or willing to make all of the day-to-day tactical decisions, which will greatly increase the number of prospective buyers. The competition to buy your company will both increase the probability of a successful sale and the price your company will garner.

Second, determine the type of strategic buyer for which you are looking. Strategic buyers will be interested in how your company will fit into their own long-term business plans. Typically, a strategic buyer will be planning:

A vertical expansion (e.g., a customer planning backward integration or a supplier planning forward integration)

A horizontal expansion (e.g., into new geographic markets or product lines)

The elimination of competition

The strengthening of its own areas of weakness (e.g., technology, marketing, distribution, research and development, etc.)

For which type of strategic buyer will your business create the most value? Once you have answered this question, you will know where to market your business.

Finally, we would advise that you seek the help of a competent investment banker who specializes in the sale of companies of your size and type. There are two reasons. First, an experienced advisor can give you a good idea of the price you are likely to get for your business. Get this assessment while there is time to make changes that will increase the value of your business. Many entrepreneurs make the mistake of believing that they can sell their businesses for much more than they actually can. It is best to face this reality while you can still do something about it.

Second, you will face a myriad of questions as you negotiate the sale of your business. Will this be an asset sale or a stock sale? Will you accept stock from the acquirer or will this be a purely cash transaction? Will you give the buyer a note for a portion of the purchase price? Will there be an earn out provision? Will you have any role in the business after the sale? If so, what will your role be and for how long? The answers to these questions are not necessarily simple and getting what is right for you is paramount. A competent adviser can be invaluable.