As a CEO, contemplating the sale of a business can be an enormous personal and professional decision. Whether the CEO founded and grew the business from the ground up, or ran the business for the past 20-30 years, there are great ties to employees, customers, and the community. They are also likely first-time sellers, apprehensive about the entire acquisition process.
As an acquisition entrepreneur, that mindset needs to be present throughout the transaction and ingrained with empathy in every seller interaction.
What Business Sellers Actually Care About: 6 Key Priorities
To find out what business sellers are looking for in a buyer, you must understand what their priorities are before and after the sale. Let's take a look at the 6 key factors sellers actually care about when it comes to leaving their legacy behind.
One of the biggest priorities for business sellers is getting a fair price for their business, rather than the maximum price which we see in many other transactions — for example, residential real estate. There are a few reasons for this. Sellers want to receive a valuation that they are comfortable with to gain several other transaction and structure benefits beyond price, including the ones we will outline below. Additionally, they want to set up the entrepreneur — a.k.a. future owner — for success by not leaving them with a large debt load from too high a price.
Regardless of what is fair, most sellers enter sale discussions with a valuation idea already in mind, whether that be from comparable transactions in the industry or a specific monetary desire for retirement. Seller comfortability with the valuation boils down to the treatment behind the quantitative number and methodology. As the searcher, work to build trust and a relationship throughout the preliminary stages of the business acquisition process so that the seller can feel they are being treated fairly.
Minimal Contingent Considerations
Because sellers are typically interested in transitioning out of the business and using the proceeds toward retirement, it is important for them to receive a majority cash offer with minimal performance-based contingent considerations (we see this most commonly with search fund transactions). Offers from buyers frequently include stock proceeds and performance-based earnouts to have the seller share more of the risk with the buyer. An unworthy risk for retiring owners with a considerable amount of net worth tied up in the business. Some sellers, however, are not completely averse to sharing the risk.
Most search fund deals have the seller agree to accept a portion of the purchase price in a series of deferred payments, including interest. These payments are not contingent on future growth either but rather guaranteed by the new business owner / searcher. This reduces the risk of non-payment for the seller and the likelihood of them starting a competing business.
Assurance the Business Will Continue as Status Quo
Post-sale, sellers want their businesses to continue largely the same, but better. It is essential to them that their brand, company culture, customer and employee relationships, and legacy remain intact — assuming it was to begin with. As many sellers have been decades-long business owners with great personal ties, they fear what an exit could mean for key components of their business, and what will be changed or eliminated completely.
"Sellers want to ensure that their employees are taken care of, that their customers continue to receive the same great service, and that what they built continues to thrive. Even after their departure, they view their business as a personal reflection of their own character and legacy, and this is not to be taken lightly."
— Adam Wilver and A.J. Wasserstein, On the Nature of What Business Sellers are Looking for in a Buyer
Comfort with the Buyer
As mentioned above, the sale of a business can be an extremely personal transaction that needs to be handled with care and professionalism. Sellers are going to be looking for a worthy buyer that withstands a significant vetting process. They want to deep dive into the potential buyer's character, personal background, and professional background. They want to understand the potential buyer's upbringing, family life, motivations, skillset, hopes, dreams, nightmares, and realities.
What it really comes down to is if they like you and if their employees, customers, and stakeholders will like you.
Sellers want a transparent acquisition process because for most, this is the first time they are selling a business. They want to know exactly what to expect, when to expect it, and who to expect it from, with a clear transaction timeline and diligence list. Additionally, it is important for buyers to understand how early and intricately sellers want to discuss valuation. Some want a specific range or methodology upfront, while others prefer to lead with relationship development.
Both parties benefit from identifying any potential red flags so that they can be efficiently worked through and identifying buyer intentions and implications. No one likes to be blindsided or caught off guard post-transaction. This "all cards on the table" acquisition process approach makes final documentation, transaction, and transition plans seamless.
The transition timeline differs across transactions, varying from months to years. However, the seller typically has an idea of a preferred timeline since the acquisition deal stems from their desire to transition out of their business. That preferred timeline needs to then align with both buyer and seller expectations. For example, buyers need to be clear on the involvement they will have in the business going forward — day-to-day manager, high-level advisor, etc. — and how it relates to the seller's ideal involvement. While expectations will be set, things may evolve post-transaction, so both parties must remain adaptable. In some situations, buyers and sellers may agree that the seller will remain on longer, for a multitude of reasons and vice versa.
Buying and selling a business are fruitful pursuits that come with challenges, good and bad. If you are looking for an acquisition expert to help guide the financing process, contact one of Flagship's business lenders today or check out one of our many free resources on ETA:
- Guide to Investment Real Estate
- Lessons on Acquisition Entrepreneurship: 5 Experts Weigh In
- Navigating Small Business Acquisitions and Mergers