When selling a privately held business with revenues under $20M, it is important for the Seller – represented by his or her advisor – to sell to the “Right Buyer”. (Generally, this doesn’t apply to companies over $20M, based on our experience at RC Advisory Services.)
When a company is smaller, the owner really looks at the business as his or her baby. Deciding to sell their business is a very emotional experience. Not only do they consider the legacy they’ve built over the years to be important, but they highly value their employees.
From a legacy aspect, their hope is that when the business is sold and in new hands, they can walk down the street in five years and hear that the company is doing well. They’ll be able to feel that what they built paved the way for future success.
When it comes to employees, they look at them as family members. They know about their struggles, successes, families, etc. And they know that the employee and his/her family need consistent and sustainable income. They want to be sure that a new buyer is going to value and take care of the employees. That means not downsizing quickly or closing the operation and moving it elsewhere.
Although the owner wants to get the best dollar value from the sale of the business, he or she may accept a lesser value for the Right Buyer. For example, if it means accepting $4.3M instead of $4.6M because of an affinity for and trust in the buyer, they’ll do it. It’s not always about the top dollar for the deal.
The larger a company is, the less this is so. Let’s say a $40M company can be sold for $15M to $20M. That’s a nice chunk of change. A company like this most likely has 150 or more employees and is at a size where the owner no longer knows every employee as intimately as in a small business. He or she probably knows a few major suppliers and customers, but most of the day to day operational and sales work is done by other staff and teams. The seller is more focused on the bigger picture issues.
So, when a buyer is willing to hand the seller a check for $15M to $20M or more, it’s “Thanks very much, I’ll take it! (Hey, I’m walking away with $20M.)” Do they care about the business legacy and employees? Of course. But not at the level as a small business that is very personal. These types of sales are to Financial or Strategic buyers and the seller knows that the business will definitely be operated in a different way.
Who is the Right Buyer for a smaller business? Someone the seller has developed a good relationship with over the course of the sale process from the time of a Letter of Intent through Closing. That relationship involves Trust – a feeling that the buyer has character and competence. The buyer is a good match for the business if there is prior relevant experience, has the necessary management skills and management style, and understands the importance of personal relationships with employees, suppliers, and customers. When the seller feels he/she is leaving the business in good hands, they have the “Right Buyer”.