For people that are coming to George & Company as a potential client where we might be selling your business, it is important to recognize that there are various kinds of business buyers that are in the market place. Each type of business buyer typically has a different motivation for exploring the acquisition of a business.
The Job Finder Business Buyer
Often during an economic down-turn or other troubled times – when “Corporate America” is struggling with decreased revenues, corporate layoffs can generate the “job finder.” These replacement job buyers are in the market to buy their own company to replace lost income and may possess no knowledge of a business or industry. They may only be looking to satisfy a particular income requirement. This kind of buyer may require a longer period of training. George & Company will negotiate the proper compensation package for both parties during this period. This type of buyer may not weigh the burden of management as much as the ability to generate a livable income doing something they believe they may enjoy.
Financial Business Buyer
Typically, a financial business buyer has a longer time horizon than the job finder. The typical financial Buyer will be looking for a financial investment, a change in occupation, or have always had a dream of owning a business. The financial buyer is more concerned with return on equity, return on investment and return on burden of management. Remember the principles of alternatives and replacements with this type of buyer. They have the option of investing in a publicly traded stock, have little time invested and may get pre-tax returns a great as those offered in a closely held business investment that may require 40 or more hours of active participation. Retrospectively, the stock market offers them little or no control of their future. Often, the financial investor likes a business that may be somewhat depressed but they believe they can buy it at a good price because of higher risk while hoping to correct problems they see and generate a higher return.
Strategic Business Buyer
The Strategic Business Buyer is usually from a similar industry and typically has a specific reason for wanting to buy a particular company. Furthermore, the strategic buyer will frequently be willing to pay a premium price in order to obtain a company possessing that quality. On the other hand, it is important for the Seller to understand the concept of “Barrier to Entry” as it can impact the value that a strategic buyer will place on a business. Barrier to Entry occurs when a buyer refuses to pay a premium price for a company because they are not looking to acquire all the aspects of that business. This results from them already understanding the business, having access to their own vendor and customer lists, enjoying membership in trade organizations, already engaged in some aspects of the industry, etc. George & Company has extensive experience with this type of buyer and works diligently to identify the Strategic Buyer’s motivation. Publicly traded companies may have excess cash and are seeking an accretive add-on that rewards the shareholder by acquiring a company at a price to earnings ratio that is somewhat less than what the company has been historically trading at. Sometimes companies will target a congeneric merger. This type of merger between firms in the same general industry but having no mutual buyer-seller relationship can be mutually beneficial. An example might be a merger between a bank and a leasing company.
In this market where wealthy individuals may have cashed out of the stock market and in search of greater returns have parked their money with Private Equity Groups (PEGS), we are seeing increased activity of these PEGS looking for both platform and add-on companies to acquire. George & Company maintains a strong ongoing relationship with most of the Private Equity Groups, both National and International in nature.
Also in play in this market are privately held companies looking to grow by acquisition as opposed to organic growth. While in the same or similar industry, they are most concerned about acquiring market share, many times hoping economies of scale will move a marginally profitable company further into the black. George & Company has the skills to identify the motivating factor(s) of a strategic buyer to enhance the value of their client company.