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Who are the potential buyers for my business? Part 3

- John Mickelson, managing partner Midwest Growth Partners, is IowaBiz's blogger on succession planning. Read more about him here. 

Last column we learned about one specific type of buyer for your business – a strategic buyer. As we discussed, these buyers may pay top dollar for your business, but the sale often comes at the expense of the culture you have worked hard to establish.

This week we learn about another possibility… a “financial buyer.”

A private equity fund or wealthy individual is a financial buyer who may seek to purchase your business with the goal of owning an asset that will provide them an attractive rate of return via cash distributions and an ultimate sale.

The financial buyer usually is involved at the board level and is unlikely to want to get involved in day-to-day management of the business. Therefore a financial buyer is likely to invest only if you (or your trusted designee) have indicated a desire to continue operating the business or they have industry contacts who can.

In addition to board-level oversight, a financial buyer will likely want to make financial investments in the business in order to grow it so it is more attractive when they sell it.

As an example, in one of our portfolio companies, we are currently renovating and expanding the office space to accommodate future growth and to attract and retain employees and customers. In another portfolio company, we are actively seeking complimentary acquisitions in order to expand the company’s geographic footprint. In both companies, we have a number of high-level employment positions to fill which will enable us to scale. While these investments will cost us money in the short run, we are confident that they will reap rewards many times over in the long run.

Financial buyers also will be more flexible in structuring a transaction to accommodate the goals of the seller than most other buyers. For instance, financial buyers may buy less than 100 percent or less than a controlling interest in a business (enabling a “second bite at the apple” discussed in this column a few weeks ago).

One of the drawbacks of a financial buyer, in addition to not paying as much as a strategic buyer, is that financial buyers are not likely to be “forever” owners. In order to achieve a return and liquidity, the financial buyer usually will look to sell the business in three to seven years, which may not always fit the time horizon of the seller.

Another down side is a small number of financial buyers have given the industry a bad rap (think Richard Gere in "Pretty Woman"). That is why it is important to confirm that the financial buyer you are talking to is (1) well capitalized so they can effectuate the transaction; and (2) trustworthy and a culture fit.

A financial buyer is not a fit in every situation but, if you are seeking to sell your business, is an alternative that is worth your time exploring. 


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