Prior to discussing confidential information about businesses for sale, business brokers require prospective buyers to complete certain forms that serve two purposes. They protect the interests of the business owners during the sale process and enable a business broker to competently assist buyers in their acquisition search. 

These documents are necessary to the process and are defined below.

Confidentiality Agreement

This document is also known as a Nondisclosure Agreement (NDA). It registers the buyer’s receipt of confidential information regarding a business for sale. 

It is also the buyer’s pledge that the confidential information is not to be shared or used for competitive purposes. It also protects the broker’s position as the intermediary in the introduction of the buyer to the seller’s business.

Personal Financial Profile

This is NOT a credit report or an official document that requires confidential information such as a social security number or your bank statement. This form requires the buyer to assess his/her financial capabilities.

It outlines the buyer’s financial condition in terms of assets, liabilities and liquidity to which the buyer attests to its truth and accuracy. It provides insight to the buyer’s availability of funds for a down payment, the purchase price range, and net earnings requirements for an acquisition. It will help narrow the focus of the businesses to research as possible candidates for purchase consideration.

Buyer Background Profile

The buyer profile is more or less an interview form that outlines business experience and other credentials that would signify a person’s qualifications to run a business. 

The information, coupled with financial capacity outlined in the Personal Financial Statement, will help match businesses with the prospective buyer’s background and interests.

Real Estate Services Disclosure Form

This form is required by the Texas Real Estate Commission and provides information about brokerage services. It advises the signatory about the responsibilities of the broker depending on who the broker represents, either the buyer or the seller.

Understand the Process

Before diving into the business-for-sale marketplace:

• You should educate yourself on the buying process.
• Assess your finances to ascertain how much you actually have as a down payment and to get you through the initial transition.
• Target businesses that suit your background, lifestyle, knowledge base, and natural talents in order to reduce risk.

Now that we’ve reviewed some of the important elements to consider in the business-for-sale marketplace, let’s discuss another situation that could potentially arise: an unsolicited offer from a competitor.

Should You Consider an Unsolicited Offer from a Competitor to Buy Your Business?

“A major competitor made an unsolicited offer to acquire my small business. The amount seems significant, what should my next step be?”

While the offer may sound great, the real question is whether or not it is an offer that truly reflects the value of the business you have built.

So, in order to make an informed decision, the first step is to seek an independent valuation from a firm that knows the marketplace.

Secondly, you need to educate yourself about what drives value and what motivates buyers.

The fact is that competitors usually pay the least for a business. There are other types of buyers that would probably pay more.

Each category of buyer has distinctive characteristics and motives for making an acquisition. The price each is willing to pay is directly proportional to their motive.

Should a valuation determine that your competitor’s offer is less than it should be, then you should let the marketplace compete for your business in order to achieve the best possible deal.

Of course, competitors are just one piece of a much larger puzzle. If you’re weighing an unsolicited offer, it helps to know exactly who else might be interested in your company and how their motivations, and the prices they’re willing to pay, compare. Understanding the full landscape of potential acquirers puts you in a far stronger position to judge whether any single offer, competitor or otherwise, truly reflects what your business is worth. 

Who Are The Buyers For Privately-Held Companies?

When selling a business, it is important to know who the buyers are for privately-held businesses and why they buy.

Most owners of small and medium-sized businesses do not think about exiting their business nor do they plan for that inevitable day. They enjoy their work and their lifestyle. Many of them do not even realize that their business may be an attractive acquisition target.

If you have been thinking about selling, this article will help you see your company as a potential acquirer might see it. Understanding who the buyers are and their respective acquisition criteria equals better preparedness when the time comes to sell. 

Having realistic expectations and understanding the factors that drive value in the marketplace will further bolster an owner’s readiness for a successful sale. Proper valuation and presentation to the most likely buyers is crucial to achieving a sale for the best price in the shortest time frame possible.

There are three main categories of buyers of privately-held small to midsize businesses: 

• The Individual Buyer
• The Investment Buyer
• The Strategic Buyer 

Each category has distinctive characteristics and motives for making an acquisition. The price each is willing to pay is directly proportional to their motive.

The Individual Buyer Category

The Individual Buyer represents the largest number of prospective buyers for small to midsize privately-held businesses. Target companies typically have gross revenues between $200,000 and $3 million. 

Why? 

Enterprises with gross revenues under $200,000 do not provide sufficient net earnings and those with revenues over $3 million become difficult for individuals to obtain the level of financing required and to compete with the other categories of buyers.

Most individual buyers seek enterprises that have full-time employees or management in place, documented operating procedures, a diversified customer base, verifiable financial records, and net earnings at least similar to their most recent salary with an upside potential for growth. 

These qualifiers give individuals confidence in the business’ continuity and stability. Employees who can run daily operations are more appealing than a business that is highly reliant on the owner’s presence or is dependent on the owner’s personal relationships with customers.

While individual buyers may not always know the latest techniques for valuing businesses, they are capable of determining if the business makes enough money to earn a livable salary, pay the debt service on the new loan to purchase the business, and provide a reasonable return on their investment. These factors are the ultimate test to see if the price and terms of the deal make sense.

The Investment Buyer Category

One of the major market shifts for privately-held companies has been the growth in the number of private equity groups over the last decade; they number in the thousands. The investment buyer’s primary goal is to acquire a company, grow it, and then cash out, usually within five to seven years through either selling the business to a public company or taking the business public themselves. 

They are primarily influenced by return on investment and prefer to invest in companies with gross revenues in excess of $5 million with superior profit margins. Their targets usually have a unique business model with a sustainable and defensible market niche and position. 

Other traits that appeal to the investment buyer are:

• Strong growth opportunities
• A compelling track record
• Deep management team
• Low customer concentrations
• Insulation from or a strategy to deal with import competition

The Strategic Buyer Category

The strategic buyer is usually a larger company in the same industry, a competitor, or a business in a neighboring industry that could capitalize on the strengths of the company.  Their targets are businesses that would complement their own and that by combining the two would create a synergy of operations resulting in lower costs, new customers, and other advantages. 

Strategic buyers are the most likely to pay more than other types of buyers because they gain a variety of financial benefits and quick business growth.

Synergy means that by joining the two companies will produce more, or be worth more, than just the sum of their parts. 

Here’s a simplified example: A large real estate company purchases a mortgage company. It can now use its existing customers (those who buy homes) and offer them the mortgage funds to finance their purchases. The benefits of this type of acquisition help both companies be more competitive and profitable.

Generally, strategic buyers target companies that have gross revenues in excess of $2 million, offer unique market share not readily available to their own company, such as opening in a new market not previously served or obtaining product lines and/or services not previously provided, but synergistic to their own customer base. 

Target companies will be especially attractive in industries where economies of scale are possible whereby the acquiring company can obtain significant post-deal expense savings, such as elimination of dual facilities, support staff, or other overhead expenses.

With More Than 230 Years of Combined Experience, Let CBB Work for You

At CBB, we’ve closed transactions exceeding $1 billion in revenue for thousands of business owners. Our vast experience means we’ve seen nearly every deal scenario imaginable. Let us guide you through valuation, marketing, negotiation, and closing with precision.

Don’t trust your business purchase or sale to chance or gut instincts. Work with a team with a reputation for reliability and success. Contact us today.