To Sell to a Strategic, Financial or an Industry Buyer? Your Role Post-Closing Might Drive the Answer

[Part 3 of a 3 part blog series]

Mike Ginsberg

You already made the decision to sell your business. You’re now faced with the daunting task of determining which buyer makes the most sense for your particular business. Will a strategic, financial or industry buyer present you with the best option?

Previously we examined how different types of buyers approach the critical element of pricing when approaching a transaction and then we looked at the particular emphasis that a buyer places on growth when evaluating in a transaction. In this blog, I will evaluate the critical role of the owner post sale.

To restate definitions, a strategic buyer is an operating company from another industry that acquires a company to expand its services and/or client base. A financial buyer, also known as a buyout firm, typically acquires majority control a business in an industry they are not currently invested into with the goal of increasing shareholder value and reselling their stake at some point in the future. An industry buyer is a company that acquires another business from the same industry, typically for expansion purposes.

What role do you, as owner, want to play post sale?

One pricing and deal structure are determined, arguably the hardest question an owner/operator will need to answer when it comes time to sell is what role he/she will play post sale. Assuming the owner is in good health, the decision whether or not to remain involved with the business post sale, retire, or sit on the sidelines until the non-compete expires will have to be addressed prior to the sale. With preparation, the outcome could be determined in advance of the selling process.

As the owner of the business, what role do you play now? If you are truly an investor-type owner who does not play any role in the day-to-day operations of the business other than a financial one, the decision to remain post sale will be strictly a financial one made by you and the buyer. Most owner/operators don’t fall into this category. Depending upon the size of the business and the number of owners, the owner plays a critical role in the operation and that role will vary significantly from business to business. A sole owner of a relatively small business, for example, may have all of the critical client relationships and also oversee operations. A buyer will undoubtedly perceive this person as critical to remain post-sale and structure the deal around his/her involvement.

The owner of a larger business may perform a particular role and rely upon senior executives to handle other functions. In a service business like a collection agency, for example, where client relationships are critical, if the owner keeps direct contact with the major client decision makers and also maintain these relationships post-sale, will undoubtedly be addressed through deal structure and non-compete and non-solicit contractual provisions.

A few years back, we advised the owners of a middle market service business in a sale. We quickly learned that both owners played critical roles in the business. One was the “inside” partner and oversaw operations and finance. The other, the so-called “outside guy,” was the face of the company who had the large client relationships. Both positions were successfully transitioned to other senior executives from within the company over an 18 month period prior to opening up the business for review by prospective buyers.

Had they not had seasoned professionals already employed within their company, they would have gone through a recruiting process which would have added months to the transactional period. During the actual sale, the executive team handled almost all of the direct interactions with the buyers. The owners were left to discuss the history of their business and watch their executive team in action. Ultimately the business was sold for a significant price for cash with very few contingencies. The buyer felt very comfortable the executive team was in place post sale and the business was well positioned for growth.

Different types of buyers view the role of the owner post-closing differently.

Knowing that strategic, financial and industry buyers view the owner’s role post-closing differently may help you as you position your business post sale. All three types of buyers will approach pricing and deal structure differently based upon their own needs, as well as the seller’s performance. Owners will view a buyer positively or negatively depending upon pricing and the role they play post sale.

To ensure that owners achieve the outcome that you are striving for in a sale, two critical things should occur prior to interactions with any buyers.

1.     Assess realistically the role that you as owner(s) are currently performing within your business. Owners may be too close to the company to determine the true role(s) they are actually playing. It is best to have an objective viewpoint from a third party and it is best to determine, in advance of a sale, how a potential buyer might perceive the owner’s role.

2.     Determine if other staff members already exist within the operation that can perform the services performed by the owner. Once that’s determined, start transitioning those responsibilities to other staff members prior to approaching a buyer about a sale. Give the person reasonable amount of time to absorb new responsibilities and grow within a new position. Like dominoes falling, transitioning responsibilities will have an effect on other individuals throughout the business so give yourself more time than budgeted to work through the changes.

With some advanced planning and preparation, an owner can control the outcome when it comes time to sell.