For small business owners preparing for succession or exit planning, finding the right buyer is essential to a successful sale process. Whether you’re ready to retire, move on to new ventures, or transfer ownership as part of a succession plan, identifying and vetting potential buyers is a critical step. A good buyer will not only pay a fair price for the business but will also honor your business’s values and vision, supporting a smooth transition for both employees and customers.
In this article, we’ll explore strategies for finding potential buyers and best practices for vetting them, helping you achieve a successful transition while securing your financial future.
Why Finding the Right Buyer is Key to Succession and Exit Planning
Succession planning and exit planning aren’t only about securing a buyer, they’re about finding the right buyer. While each sale process is unique based on the seller’s goals, most successful transactions hinge on two main factors:
Price and Terms: A valuation and structure that matches the seller’s goals across financial, tax, and risk considerations.
Business Continuity: The ideal buyer should have the resources, experience, and commitment to maintain and grow the business, providing continuity for employees, clients, and vendors.
The following sections outline the steps to take in both finding and vetting potential buyers, ensuring you can meet these goals.
How to Find Potential Buyers for Your Business
When starting the search for potential buyers, consider various avenues, each with unique benefits and challenges.
1. Internal Candidates
Internal transitions are popular in succession planning, especially for family-owned businesses or those businesses that qualify for SBA loan financing. This option allows for a smooth ownership transfer and typically maintains business continuity.
Family Members: If succession planning involves family, consider the commitment and capability of family members interested in taking over.
Management Buyouts: Selling to your management team can ensure business continuity and provide a smooth transition since managers know the business. This will, however, require that management acquire the departing owner’s equity either via a cash investment from management, a bank loan, or an earnout.
2. Employee Stock Ownership Plans (ESOPs)
An Employee Stock Ownership Plan (ESOP) allows employees to buy shares in the company, giving them an ownership stake. ESOPs work well for owners wanting to reward loyal employees and maintain a positive legacy.
Benefits: Retains business culture, increases employee commitment, and provides gradual ownership transfer.
Risks: Requires financial structuring, often with help from ESOP experts, that can be costly and can take time to fully implement.
3. Competitors or Industry Buyers
Competitors or other businesses in your industry can be prospective acquisition partners. They may want to expand geographically, add new customers, or gain additional expertise.
Benefits: They understand the industry and are more likely to pay a premium for established customer bases and brand reputation.
Risks: Confidentiality can be a concern, and so too can negative impacts to an employee base due to redundancy of positions. Your brand may also be sunset.
4. Individual Buyers
Selling to an operator is an increasingly popular option that makes up one-third of all small business transactions. Individual buyers are typically entrepreneurs who have equity to deploy in an investment, whether personal capital or investor capital.
Benefits: Flexible deal structuring for the seller and minimal disruption for employees and customers. Opportunity for sellers to fully transition out of the business and pass operations into capable hands.
Risks: Make sure the acquirer has access to equity capital, and that the buyer’s experience is a good fit for the company’s operations and culture.
5. Private Equity and Venture Capital Firms
Private equity (PE) firms and venture capitalists (VCs) typically seek a return on investment during a three to five year horizon. VC investors look for businesses with significant growth potential, while PE investors value cash flow and growth.
Benefits: Can provide capital and domain expertise that support growth initiatives.
Risks: Some PE and VC firms may make significant changes, affecting company culture and employee stability. Sellers may be required to stay with the business, and may feel pressure to hit quarterly or other operating goals.
6. Online Marketplaces and Business Brokers
Using business brokers or online marketplaces like BizBuySell or Axial can help you reach a broad pool of potential buyers. Brokers typically have buyer networks and can manage much of the sales process for you. For more on whether a broker is right for you, reference this article.
Benefits: Access to a wide range of buyers and assistance in negotiation and valuation.
Risks: Brokerage fees, typically a percentage of the sale, and potentially less control over buyer selection. Risk that the broker is bandwidth constrained and offers low touch services.
How to Vet Potential Buyers for Succession and Exit Planning
Once you’ve identified potential buyers, it’s time to vet them carefully. Proper vetting is crucial to ensure that the buyer is both financially capable and culturally aligned with your business.
1. Assess Financial Capability
It goes without saying that the buyer should have the ability to finance the purchase. Here are some ways to verify access to capital:
Review Financial Statements: Request financial statements or proof of funds from buyers to confirm they have the resources for the purchase.
Consider Financing Options: Some buyers may seek financing through Small Business Administration (SBA) loans or private lenders. Ensure they have the necessary pre-approval or credit qualifications.
Check Cash-at-Close Readiness: Qualified buyers should have the means to show up to closing with required cash to complete the deal.
2. Evaluate Industry Experience and Business Knowledge
A buyer familiar with your industry or business model is more likely to succeed in the transition. This experience can reassure employees and clients and ensure continuity.
Professional Background: Assess the buyer’s previous experience, especially if your business requires specific knowledge or certifications.
Alignment with Business Values: A buyer with a similar philosophy and values may provide a smoother cultural transition, particularly important in family-run or customer-oriented businesses.
Operational Skills: Confirm the buyer’s operational skills or willingness to retain existing managers to run day-to-day operations, maintaining business stability during the handover.
3. Examine Strategic Intentions
Understanding the buyer’s intentions for the business can prevent potential conflicts and protect your legacy.
Growth vs. Resale: Some buyers intend to grow the business, while others may look to resell quickly for profit. Discuss their intentions to confirm they align with your succession planning or exit goals.
Employee Impact: Evaluate whether the buyer is committed to retaining employees, especially those critical to the business’s success.
Future Plans: Ask about their plans for the brand, product line, and overall strategy. Ensure their vision aligns with yours, especially if you want to preserve the business’s identity.
4. Negotiate Terms and Expectations
During the vetting process, negotiate terms that ensure both parties are aligned on expectations and responsibilities.
Outline Transition Support: Discuss any involvement you’ll have post-sale, such as training or advisory roles, and agree on terms for a smooth transition.
Set Clear Financial Terms: Finalize pricing, payment terms, and any contingent considerations (e.g., earnouts), ensuring the sale structure works for both parties.
Closing the Deal: Final Steps in Vetting Potential Buyers
Once you’ve chosen a buyer and finalized negotiations, take these final steps to close the deal:
Legal Review: Work with legal advisors to review sales and other contracts, ensuring all terms are clear and legally binding, and to draft the purchase agreement.
Financial Review: Confirm that all financial arrangements, like deposits and payment structures, are secure.
Finalize Succession or Exit Plan: Implement your succession or exit plan to ensure a smooth handover, including a transition timeline and communication plan.
Final Thoughts
Finding and vetting the right buyer for your business is a critical component of succession and exit planning. By thoroughly assessing financial readiness, industry experience, and alignment with your vision, you can confidently transition ownership while safeguarding your legacy. Whether selling to family, employees, or an external buyer, a methodical approach to finding and vetting buyers can result in a smoother transition, business continuity, and long-term success.
