Industry Insights

Selling Your Business Within 5 Years? 7 Best Things to Do Now

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Most business owners approach selling your business much like my son approaches his homework – they avoid thinking about it until they absolutely have to. It’s understandable. For many owners, their business is their baby, their employees are their family, and they enjoy the challenge and sense of purpose derived from their work. That said, when it comes to selling, business owners owe it to themselves to begin planning early.

Good preparation leads to a significantly improved outcome – including a higher purchase price, shorter time on the market, and fewer post-transaction requirements. If you are thinking about selling your business within the next 5 years, here are the 7 best things you should do now.

selling your business within 5 years

Focus on Growth and Profitability

Generally, buyers will ask for 3 to 5 years of financial statements as part of their due diligence. Buyers like to see year-over-year growth, and consistent or growing margins. Additionally, the valuation a buyer places on your business will likely be tied to your financial statements. Therefore, it makes sense, in years leading up to a sale, to focus on growth and profitability. Consider developing a business plan to accomplish specific goals within the timeframe you have prior to exiting. To address revenue growth, your strategy might include adding a second shift, launching a new product or service, or hiring additional sales personnel.

To address profitability, you might look to increase prices, eliminate non-essential processes, or reorganize your physical space. Regardless of your strategy, make sure your goals align with your time to exit. Moving to a larger facility, for example, might be a good long-term initiative, but require more time than you have to favorably impact your financial statements.

Tee It Up for a Buyer

Any steps you can take to simplify an acquisition and better position your company for a buyer will improve its valuation. This might mean changing the structure of the business, solving capacity issues, rebranding, or putting better systems and processes in place. If, for example, you have a slow-growing legacy business under the same roof as a new, rapidly growing division, it might make sense to separate the two. Or, if you’re in an industry that is facing some headwinds, you may benefit from getting a foothold in a new market. Think about who your buyer is likely to be, and what they will be looking for in an acquisition – then work to position your business accordingly.

Make Yourself Redundant

The less dependent your business is on you, the more valuable it will be to a buyer, and the more likely you’ll be able to exit without a lengthy transition. If you currently play a critical role in day-to-day operations, look for ways to hand off some (or all) of your duties prior to selling. This might mean hiring and grooming your replacement, transitioning customer relationships to others, or giving more responsibility to your management team.

These are not easy adjustments to make. It can be challenging to trust your team with key functions, and there is some risk that changes could create problems. However, if you are successful in building a structure that allows the business to run independently, it will be a significantly more attractive acquisition candidate. Some owners decide after taking this step that they don’t need to sell after all, instead holding on to what essentially becomes an “annuity”.

move toward predictable revenue

Move Towards Predictable Revenue

Perhaps the most important determinant of value is the extent to which a buyer can predict revenue (and profit) post-transaction. Businesses with lumpy sales, whether project-based, cyclical, or otherwise, tend to be discounted. So, think about ways you can move towards predictable revenue. You might look to roll out a subscription model, offer a maintenance program, or simply ask your existing customers to sign long-term contracts with purchase commitments.

If your business is cyclical, there may be steps you can take to normalize income. A company selling ski accessories with heavy sales in the winter might look to get into beach products. Owners with highly predictable revenue often command a valuation multiple of sales vs. profit, so taking steps in this direction could be rewarding.

Keep Straightforward, Accurate Financials

One of the first steps a buyer will take is to review 3-5 years of profit and loss, cash flow, and balance sheet statements. It is important that you have these statements available, and that they provide a true picture of your business’ financial state. In years leading up to a sale, businesses should make sure they are keeping up with the basics, including taking regular inventory, reconciling bank statements, and properly accruing expenses. While audited financials are not necessary (and are rare for small businesses), buyers do look favorably upon them.

A less expensive alternative is to have your financials reviewed. It might be helpful to hire a CFO or controller, even if fractional/part time, and/or to engage a CPA firm familiar with your industry. Lastly, consider changing any “write off” habits leading up to a sale. While most business owners look to expense everything possible to keep profit and taxes at a minimum, a lower profit on your books could translate to a lower valuation.

Address Risk Areas

Some risk areas for a buyer include customer or supplier concentration, pending legal issues, old equipment, insufficient IP protection, or a lease without an option to renew. With a sufficient time-horizon, all of these areas can be addressed and improved. If you have one customer that comprises 25% of revenue year after year, focus on building other relationships and bringing on new customers to reduce the concentration. If your equipment is old, look to update it prior to a sale. Like selling a house, fixing any problems prior to selling will make for a smoother transaction.

net result

Know What You Need to Net

An important step in preparing to selling your business is to assess what you will need to net. Is there a number below which it would not make sense to sell – whether for retirement, an investment, reduction of debt, or another purpose? If so, you will benefit from working with your CPA (or another knowledgeable professional) to assess whether you are likely to achieve that number, after taxes, from a sale. Understanding your target will help you to determine your timeframe, and any steps you may need to get there.

So, as hard as it may be, it’s worth thinking through your exit plan if you expect to be selling your business in the next 5 years. You may well be able to identify a few areas where modest steps can have a significant impact on the process and net result.

We hope this information on selling your business is useful as you consider your options at home or abroad. We operate Hatchit, the global deal directory for brokered and for-sale-by-owner businesses with valuations ranging from $25k to over $20 million. Using our extensive industry knowledge, we offer a broker match service to help you find the right assistance for your seller needs. – The Hatchit Team

Images from Pixabay.

Disclaimer: This page contains affiliate links to Hatchit’s broker-partner sites. If you choose to buy or sell a business through a brokerage site we link you to, Hatchit may receive a referral fee at no additional cost to you. Thank you.

Ecommerce Sales for Third Quarter 2022

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Summary:  E-commerce sales for third quarter 2022 outpace retail sales over last quarter and Q3 2021, according to the latest statistics from the U.S. Department of Commerce.

Third Quarter 2022

  • The estimate for U.S. retail e-commerce sales for the third quarter of 2022, adjusted for seasonal variation, but not for price changes, was $265.9 billion, an increase of 3.0 percent (±0.5%) from the second quarter of 2022.
  • The third quarter 2022 e-commerce estimate increased 10.8 percent (±1.2%) from the third quarter of 2021 while total retail sales increased 9.1 percent (±0.4%) in the same period.
  • E-commerce sales in the third quarter of 2022 accounted for 14.8 percent of total retail sales.

third quarter ecommerce sales

As you can see from this graph, the percent of e-commerce sales vs. total retail sales on an adjusted basis remains strong and has not been affected by higher interest rates or other macro factors.

Take a look at third quarter 2021 and second quarter 2022 numbers for comparison.

Source: U.S. Census Bureau News, Press Release, November 18 2022

Closing the Business Sale

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We continue to post chapters from our upcoming ebook guide, How to Sell an Online Business, to help business owners prepare for a sale. In this sixth and final chapter, we look at the seller's role in buyer due diligence and the documents needed in closing the business sale.

closing the sale

6. Due Diligence and Closing the Business Sale

Once a letter of intent or similar document has been signed, the next step is for the buyer to conduct a more formal due diligence. The buyer’s main goals in due diligence are to confirm that the business is in fact as presented, and to gain a clear understanding of the risks and opportunities associated with the business. The high-level areas of focus for due diligence are legal, financial, business operations, and market.

Legal

Legal due diligence is to assess whether the company is in good legal standing and whether there are items that could present risk to the buyer. Key areas a buyer might investigate are:

  • Corporate Structure

Your company’s corporate structure, capitalization, organizational documents, and general corporate records.

  • Taxes

Historical income tax liabilities and any tax carry forwards and their potential benefits.

  • Intellectual Property 

The company’s technology and intellectual property, as well as its protection.

  • Assets & Liabilities

The value of the assets that will be transferred with the sale, whether tangible or intangible, as well as all debts and liabilities against them.

  • Contracts

Contracts and commitments of the company.

  • Compliance & Litigation

Any pending, threatened, or settled litigation, arbitration, or regulatory proceedings and whether your company has faced any regulatory or compliance issues.

Financial

The buyer will conduct financial due diligence to verify that financial statements presented are accurate, and to gain a clear understanding of items that could impact the future financial performance of the company. For larger acquisitions, a CPA or other third party may prepare a Quality of Earnings (QoE) report to detail the components of the company’s revenue and expenses. The extent of financial diligence performed, and the quality of information available will vary considerably with the size of the business. 

business operations

Business Operations

The purpose of business operations due diligence is for the buyer to gain an understanding of the company’s people, assets, technology, and processes. For online businesses, some of the most important assets are often the business’ sources of traffic, its platform and reputation.

Market

Market due diligence is unlike other aspects of due diligence in that information is gathered from outside of the company rather than from within. However, you may be able to assist the buyer in their assessment by providing reports, contacts, and other resources to help provide them with a more comprehensive understanding of the opportunities and threats in the space.

The extent and duration of due diligence can vary widely based on the size and type of transaction, lasting anywhere from a few weeks to three months or more. The time frame can be shortened when the information requested is available and organized, so upfront preparation can be helpful.

closing documents

Closing Documents

As the buyer conducts due diligence, they will often prepare an initial draft of closing documents for your review. Depending on the complexity and size of the transaction, a purchase agreement can be very simple or very complex. While a simple transfer of a digital asset may only require a bill of sale, the acquisition of an income-producing business is typically accompanied by an Asset Purchase Agreement (APA) or Stock Purchase Agreement (SPA).

Most acquisitions are asset purchases, meaning that the buyer transfers the tangible and intangible items owned by the business from the seller’s corporate entity into a different corporate entity owned by the buyer. These items generally include everything from the website, customers, and inventory to trademarks, patents, and goodwill. By contrast, in a stock purchase, the buyer acquires the seller’s business entity itself, which includes all of the assets and liabilities contained within. In either case, you will want to work with an M&A attorney to review the buyer’s proposed draft. 

Asset Purchase Agreement (APA)

The key elements of an APA include a complete list of the assets being purchased (and not being purchased), liabilities assumed, the purchase price and how it will be paid and allocated for tax purposes, details on the closing and post-closing adjustments, seller and buyer representations and warranties, and the handling of disagreements post-transaction.

There are typically schedules attached to the APA, including financials, organizational documents, contracts, permits and other key items upon which the purchase decision was based. Lastly, there are often separate agreements simultaneously signed when closing the business sale that handle elements of the transaction that fall outside of the APA, such as non-compete or consulting agreements.

Stock Purchase Agreement (SPA)

In a stock transaction, the buyer purchases the stock of the company from you, rather than its company’s assets. In doing so, the buyer assumes title of all assets and liabilities. While many of the provisions, schedules, and ancillary documents of an SPA are similar to an APA, the document itself is often simpler, since it does not need to delineate the specific elements of the purchase, or provide as much protection to the buyer around assumed liabilities.

While buyers tend to prefer asset purchases, sellers generally prefer stock sales. Asset purchases are less risky for a buyer in that they will not assume uncertain liabilities. Additionally, asset values can be determined as part of the purchase and the re-depreciated, to reduce taxes after the transaction. Stock sales are generally more favorable to the seller from a tax perspective, and they allow for a cleaner break from the business.

transition

Transition

You will need to work closely with your team and the buyer’s team to transition the business through due diligence and after. Most importantly, you will need to inform and transition stakeholders, minimizing disruption to the business. These include employees, customers, suppliers, and dealers. Other elements requiring attention include the following:

  • Computer, software, and website usernames and passwords
  • Operating manuals
  • Stakeholder contact information
  • Vendor contact information
  • Alarm codes, safe combination, keys

Quick Answer takeaways:

  • Be transparent about any legal or other issues the buyer may raise.
  • Have your attorney review the buyer's proposed draft of the purchase agreement.
  • Write up a complete list of the operational things that need to get done before closing the business sale. 

We hope you took away a few insights that will help you with closing the business sale. Feel free to browse businesses for sale in our deal directory or download our buyer's guide. Email us with any comments, suggestions, or insights of your own. 

Images from Pixabay

Empire Flippers: A Highly Successful Tech-Enabled Approach

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On the About Us page of their website, Empire Flippers writes, “Hmm, how shall we say it, we run things a bit, different.” Well, Empire Flippers is different – as much a technology company as a broker. Think of the firm as the Carvana of website brokerages. Like the disruptive online used car retailer, their purchase process features curated and vetted inventory, fair pricing, transparent online deal marketing, web-based tools and resources, and automation – removing friction from transactions.

Beyond their platform, Empire Flipper’s staff of about eighty is there to support and guide buyers and sellers through each stage of a deal. The tech-enabled approach has been highly successful. Empire Flippers has brokered over $400 million in digital business transactions and has appeared five times on the Inc. 5000 list of America’s fastest growing companies. They have sold over 73% of all businesses listed, with listings often selling in less than 2 months.

Empire Flippers team

Sophisticated Buyer Tools

With over 170 online businesses for sale on their website, and purchase prices ranging from $20k to $20 million, Empire Flippers is one of the largest brokerages in their space, representing a broad range of opportunities. Each deal is classified across a number of parameters, so sophisticated buyers can easily identify matches to exacting search criteria. In order to have access to the full extent of filtering available, buyers are required to sign up for the platform, which is free.

Once signed up, buyers can search across 18 “Monetization” categories, from Amazon Associates, FBA, FBM, KDP and Merch, to Display Advertising, eCommerce, and SaaS. In addition, opportunities are classified under one of 58 “Niches” that range from Advertising to Technology. Other search filters include financials, platforms, date created, country, SKU count, monthly unique visitors, and more. Everything is handled within a customizable dashboard. Sellers can manage all communications and see the progress of their business sale in one place. Buyers can create watchlists, get notified about new listings that match their criteria, and schedule calls with sales advisors and business sellers.

Inc. 5000 fastest growing companies

Vetting  Serious Buyers

Once signed up, buyers can view basic company information, but in order to see the company URL, view detailed traffic and earnings reports, and ask the seller questions, a listing must be “Unlocked”. In order to Unlock listings, buyers are required to become “Verified”, proving identity and availability of funds. The verification process is entirely automated, and while it takes some time upfront, it ensures the team and seller can be focused on real candidates rather than tire kickers. Empire Flipper’s buyer network is a capable group with over $7 billion in liquidity. For smaller deals, the marketplace actually includes a “Buy It Now” feature, enabling a purchase at the click of a button. Empire Flippers also allows buyers to hold funds in an online “Wallet,” enabling them to lock in a deal faster, without the need for wiring funds.

A System Built for Sellers

Empire Flippers seeks websites with a solid track record, earning at least $2k net profit per month over a 12-month average. They typically list businesses for sale at 20x to 60x average monthly net profit, with the multiplier depending on a number of factors. Empire Flippers has developed a sophisticated online valuation tool so sellers can gain a clear sense of potential pricing on their sale. The tool is highly customized, taking a separate approach for each of the 18 Monetization categories, and its algorithm is programmed with data from the sale of over 1,900 businesses.

If a business owner decides to list a business, upload of company information is also automated and protected. The Empire Flippers system takes a business owner through a number of steps to gather personal data, site details, screenshots of financial data, and Google Analytics or Clicky data/access. Empire Flippers team members are available to help with the listing process, and once a deal is live, can assist with buyer calls, negotiation, migration, and other elements of the transaction. Fees generally range from 5-15% of the transaction value, depending on the size of the deal. Unlike some marketplaces, Empire Flippers does not include the URL with its public listings, helping sellers maintain confidentiality.

Business valuation formula

Tools and Resources

The company has put significant effort into developing a library of content and other useful tools and resources for its 250k users. From hundreds of searchable blog entries, 720 episodes of “The Real Money. Real Business Podcast,” the 98,462 downloads of The Opportunity Podcast, to the nearly 100 videos on their YouTube channel, the firm offers a wealth of information from which buyers and sellers can draw. What’s more, their offerings extend beyond users to their industry partners, with an automated referral program and a robust API for easy listing syndication. These partner tools strengthen ties with industry players and place Empire Flippers at the center of deal and buyer activity.

Empire Flippers Capital

EF Capital

For entrepreneurs and investors seeking a passive-income opportunity, diversification, or just to dip their toe into the water of online business acquisition, Empire Flippers last year launched EF Capital. The platform pairs top web businesses for sale with capable operators, leveraging the power of crowdfunding to allow accredited investors to invest in high-growth internet opportunities. A new EFC round just launched with operators seeking financing for deals that include Amazon FBA, FBM, KDP, Affiliate, Display Ad, and E-commerce businesses. Deal sizes range from $1-$3 million, and the minimum investment is set at $25k.

Shopify Exchange Customers

As many in the online business acquisition community know, after 5 years in business, Shopify closed its Exchange Marketplace on November 1st, 2022. As a result, Shopify users no longer have access to a dedicated marketplace to sell their store. Empire Flippers is offering a 25% discount on their brokerage fee for Shopify stores that list with them prior to December 31, 2022.

On a Personal Note

Not long after our founding in 2019, Empire Flippers founder Joe Magnotti took the time to meet with the Hatchit team to learn about our startup marketplace. We are fortunate that Joe supported our efforts right from the start, advising us, and helping us gain an early foothold. The entire Empire Flippers team has demonstrated a collaborative, professional, and (despite their success) humble approach to business. It has been a pleasure working with them.

bottom line

Bottom Line

Whether it’s a 5-figure deal or an 8-figure deal, Empire Flippers is equipped to facilitate a smooth, efficient transaction. They offer buyers and investors a wide array of vetted opportunities, and sellers a sophisticated platform, capable team, and extensive buyer network. The firm’s tech-enabled approach – from granular filtering and useful tools, to automated vetting, valuation, and sign up – helps streamline the process. If you are a website buyer, investor, or seller, you should definitely check out Empire Flippers.

Disclaimer: This page contains affiliate links to Hatchit’s broker-partner sites. If you choose to buy or sell a business through a brokerage site we link you to, Hatchit may receive a referral fee at no additional cost to you. Thank you.

Read more about broker profiles.

How to Engage with a Business Buyer

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We continue to post chapters from our upcoming ebook guide, How to Sell an Online Business, to help business owners prepare for a sale. In this fifth chapter, we look at how to engage with business buyers toward a signed Letter of Intent. 

business buyers

5. Bringing Buyers to the Table

With the most likely buyers identified, the next step is to bring them to the table. Institutional buyers, whether competitors, investors, or aggregators, may be easily reached through a targeted outreach. Individual entrepreneurs, however, may need to be identified with broad-based marketing efforts on marketplaces and through other channels. If your most likely acquirer is an individual entrepreneur, think through the skills that are required to run and grow the business, perhaps developing a profile like that touches on key characteristics.

Your Business Buyer Profile

Ideal buyer profile for an outdoor gardening blog:

  • gardening enthusiast
  • content writer
  • photo editing skills
  • adept with social media
  • WordPress experience
  • SEO blogging skills
  • Affiliate ad knowledge
  • Organized

Similar to advertising for a job opportunity, your marketing can highlight points from this profile to ensure you are attracting the right individuals. Additionally, the skills required might inform where you advertise. For example, attracting a buyer like the above might include marketing on gardening sites. In any case, you will likely want to take a multi-channel marketing approach that could include:

  • Business broker site (if you are working with a broker)
  • Direct confidential inquiries through email/phone
  • Online marketplaces
  • Social media
  • Local ads
  • Industry-specific ads

Multiple Dialogues

As you begin to engage with buyers, your goal should be to maintain multiple dialogs simultaneously, and to create buyer competition. Some brokers achieve this by setting dates for each stage. For example, “all prospective buyers must submit an indication of interest by February 1”. This approach can help the seller maintain control and keep buyers moving forward. As you think through your marketing plan, decide whether this approach makes sense for your business, and if so, determine the timeline and due dates so you can communicate them to buyers.

For this approach to be effective, however, you will need to be ready to share your marketing and diligence materials with a business buyer. One effective way to manage this stage is to set up an online data room. There are numerous online options including iDeals, Citrix, and Datasite – or you can simply use DropBox or Google Drive. You should expect a buyer and their team to look at (partial list):

  • Company information and ownership
  • 2-5 years of financials and bank statements
  • 2-5 years of tax returns
  • List of inventory (if applicable)
  • Customers with % of revenue
  • Suppliers with % of revenue
  • IP and tech assets
  • Any legal issues
  • Accounts receivable & payable
  • Website metrics

After initial meetings and sharing basic company and financial information, buyers may begin to make offers on the business. Offers may come as a high level “term sheet” or “indication of interest”, or a more comprehensive “letter of intent”. Once offers have been received, it is your (and your broker’s) job to vet and respond to them.

letter of intent

Term Sheet/Indication of Interest

A Term Sheet or IOI is generally a high-level, bulleted summary of the offer. Points conveyed may include purchase price, payment terms, any personal guarantees, specifics on the assets or stock being purchased, handling of accounts receivable, accounts payable and inventory at close, specifics on any non-compete or consulting arrangements, specifics on any property or other leases (or purchases), and any conditions to the offer. The purpose of the document is to provide a simple, non-binding summary of how a buyer plans to approach a deal.

Letter of Intent

An LOI may follow, or be presented in lieu of a Term Sheet/IOI. A Letter of Intent is generally a more formal, legal document reviewed by an attorney and signed by both parties. LOIs are typically non-binding, and they generally include an “exclusivity” provision. So, once a prospective seller signs the document, they may be prohibited from talking with other buyers for a period that generally falls between 30 and 120 days.

Building Rapport with a Business Buyer

It’s best to manage buyer’s expectations right from the start, particularly if there is a significant discrepancy between an offer and the price and terms you are willing to accept. In-person meetings or video conferences are generally better alternatives to phone, text, or email when addressing sensitive topics.

It can be helpful to involve a third party when reviewing and responding to offers. Involving a third party will help you to maintain a strong, cordial relationship with buyers while at the same time making a case for a more favorable deal. Individuals with whom you work with should have relevant backgrounds, present themselves professionally, and be able to articulate your position in a respectful way.

building rapport

Negotiation

Purchase price is just one component of an offer. Deal terms, too, significantly impact the attractiveness of a proposal. Is the buyer seeking seller financing or performance-based compensation? Are you required to stay on for a lengthy transition? Is the buyer proposing a stock purchase or an asset purchase, and how will that impact your net after taxes? Work with your team to understand all elements of any offer received so you can compare and assess which are workable. Some key negotiation principles that might be useful.

  • Develop a game plan
  • Focus on interests, not positions
  • Use objective material to make your case
  • Avoid emotional responses
  • Identify areas of mutual interest
  • Work toward a win-win result

Buyer Diligence

Before signing an LOI, it makes sense to do some background research on the prospective buyer. Perhaps the simplest way to assess financial capability is to ask the buyer to provide specifics on how they plan to fund the purchase. For an individual buyer, this might mean showing you a bank statement or letter from the individual’s CPA.

For an institutional buyer, it might mean providing detail on their fund size and status, and/or specifics on past transactions. It can also be a good idea to request a credit report for the buyer. You can request a credit report through Experian, Equifax or TransUnion. In some cases, it might also make sense to conduct a full background check to assess whether there exists any criminal or litigation history.

If you are fortunate, you will receive multiple offers and have the leverage to push back on unfavorable deal points. Try not to burn any bridges along the way, so you can maintain as many options as possible.

Quick Answer takeaways:

  • Pursue a variety of outreach strategies.
  • Create a data room for buyers to access your key info.
  • Don’t dismiss an offer out of hand if it is within your ballpark of acceptance.
  • Build rapport with a potential buyer to improve the outcome.
  • Make sure the buyer has the funds to close and look into their background.

Learn how to assist a buyer with due diligence and what closing documents will be needed in the next and final chapter of the Seller's Guide.   

Images from Pixabay

Identifying Promising Business Buyers

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We continue to post chapters from our upcoming ebook guide, How to Sell an Online Business, to help business owners prepare for a sale. In this fourth chapter, we profile different types of prospective business buyers for your company. 

identifying buyers for your business

4. Going to Market

The universe of potential buyers for online businesses is wide and diverse – from individual entrepreneurs, search funds, and family offices, to strategic acquirers, private equity firms, and aggregators. There are pros and cons to each and there may be differences that will impact valuation, deal structure, and the direction of the business post-transaction. Following is some detail to help you identify which business buyers might be most appropriate. 

Individual Entrepreneurs

For smaller digital businesses, individual entrepreneurs might well be your best target buyers. The appeal of business ownership compels many entrepreneurial individuals to take on the risk of a business purchase. On the plus side, an individual buyer can share your passion for the business and pour their heart and soul into it. A business buyer with the right motivation and experience might take your business to the next level, bringing your employees along for the ride.

That said, individual business buyers are often investing personal savings as equity into a deal, and may be more likely to seek bank or seller financing as part of its structure. Sellers should confirm early on the availability and source of capital for the down-payment, and assess the viability of bank or seller financing. Additionally, with personal savings on the line, emotions can boil up and make negotiations and diligence more challenging with individuals than with institutional buyers. In general, individual entrepreneurs have less financial flexibility than institutional, particularly strategic/industry business buyers.

5 reasons to consider selling your business to a search fund

Search Funds

The search fund model is an interesting “hybrid” approach to business acquisition. “Searcher funders” are individual entrepreneurs, often recent MBA graduates, who undergo a dedicated, often two year search to acquire a single business which they plan to run. With a number of institutional investors backing search funders, many are focused on larger businesses than individual entrepreneurs, often with a minimum of $1 million or $2 million EBITDA.

Search funders can offer the passion, continuity, and immediate leadership of individual entrepreneurs, with perhaps better access to capital, more financial flexibility, and the support of a “bench” of experienced investors. That said, search funds typically do not have committed capital; their investors generally back them on a deal-by-deal basis, so there is some funding risk. Additionally, some owners may find it challenging to hand over the reins to a newly minted MBA.

Family Offices

A family office is a private investment firm established to manage a family’s wealth. While their role can vary significantly, many of these firms invest in and acquire privately held companies. Investment criteria can vary greatly based on the goals of the family, though many have a lower size threshold than private equity groups and other institutional investors. Additionally, family offices have flexibility on the hold time of their investments and in some cases will own and build companies indefinitely.

strategic acquirers

Strategic Acquirers

Business buyers that acquire companies to complement another entity are known as strategic buyers. Rather than purchasing a company solely based on its financial performance, these buyers are interested in leveraging the value inherent in the business – whether the customer base, traffic, IP, domain, or otherwise. Because strategic buyers see value beyond financial performance, they may have the flexibility to pay more for a business than a “financial” buyer. That said, extracting the value of an acquired business may mean rolling the company into another entity, which can impact the employee base, brand, and other elements of the business.

Private Equity Firms

PE firms raise private capital from sources that might include pension funds, endowments, and high net worth individuals to invest in or acquire companies. Private Equity firms generally build a portfolio of businesses which they support financially and through board oversight, with the idea of growing the businesses and selling them for a profit. The fund size of private equity groups can vary widely, from millions to billions of dollars.

Those groups with smaller funds might acquire or invest in smaller, closely held businesses, either as a standalone investment, or as an “add on” to an existing business in the portfolio. PE firms are generally sophisticated buyers which can make the process easier for a seller. That said, their goal is to grow and sell businesses, often with a 2-5 year time horizon, which is not appealing to some sellers.

Aggregators

A number of Aggregators have emerged in recent years, focused on acquiring e-commerce, Amazon FBA, Shopify, and other online businesses. In general, the strategy is to create a portfolio of small businesses around similar market segments or target customers. Aggregators, which may possess expertise in a particular space and/or benefit from the economies of shared resources, seek to build value exponentially by adding brands to their portfolio.

Aggregators range from individual entrepreneurs with a few holdings, to companies like Thrasio, which raised over $1 billion in 2018 and owns over 200 brands. Aggregators can be a good alternative to individual entrepreneurs for owners of smaller e-commerce businesses.

plan for success

Depending on the size and profile of your business, some of these categories of business buyers will be more appropriate than others. In developing your marketing strategy, think through the mostly likely buyers, and the types of buyers to whom you would feel most comfortable selling.

Quick Answer takeaways:

  • Know who your ideal business buyer is.
  • Ask questions that reveal their level of interest.
  • Confirm they have the funds to close the deal.
  • Make sure your marketing outreach is focused on your ideal buyer.

Learn how to engage with business buyers in the next chapter of the Seller's Guide.   

Image by Pexels from Pixabay.