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Finding The Right Buyer For Your Business

You’ve decided you’d like to sell your business, but have no idea where to start, or how to find a buyer. Here are ten places to get you started.

Chris Staines

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One of the most asked questions when considering the sale of a business is how to find a suitable buyer. Naturally you want to consider all of your options to make sure that you maximise the sale price.

You’ll also most likely be concerned about going to the more obvious candidates straight away, as this can often provide market information to competitors that can be damaging.

You’ll also be wary of alerting customers, suppliers and employees of an impending sale, and hence confidentiality whilst sounding out the market is paramount.

Related: 10 Questions to Ask Before Selling Your Business

Included below are some of the options that you can consider, usually through an M&A advisor to add another layer of confidentiality, and some comments on the merits or otherwise of each.

1. Competitors looking to expand product/market/team/profits

Often the most obvious candidate to buy your business is the one that can cause you the most problems in the market.

Competitors will understand your business and the market you operate in, and also appreciate the value of your company – especially where such an acquisition delivers synergies that can boost combined profits.

Approaching competitors can also have its downside – especially when a sale transaction does not proceed.

Armed with the knowledge that your company is for sale, the competitor could use the information to their advantage, and without necessarily breaching a confidentiality agreement. This must be considered before going down this route.

looking-for-opportunities

2. Companies looking to vertically integrate – up or down

Companies looking to vertically integrate might include your suppliers looking to enhance the value of their product offering, or your customers looking to include the profit margin from their own suppliers. Although not as common as a competitive buyer, if such a buyer can be found they are generally favoured over a pure competitor. Confidentiality is less likely to be an issue as such buyers would not want to damage an existing relationship.

Related: 3 Ways Emerging Entrepreneurs Run Financially Sound Businesses

3. Companies looking to enter a foreign market or get a national presence

Finding a buyer that is looking to enter your market can be extremely attractive, but you may need the services of an M&A advisor with a good international network to unearth such a company.

Confidentiality is likely to be less of an issue, and a much higher multiple may be applied to profits from, say, either a European or US buyer.

On average, listed PEs are some 40% higher than South African PEs in these markets, and this disparity remains even when PEs are discounted down to private company multiples.

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4. High net worth individuals or teams

Another interesting group of buyers are high net worth individuals or teams that have either their own money, or significant backing, and a desire to enter an industry such as yours. This often includes individuals with considerable business experience that is relevant to your industry.

On the upside, confidentiality is much less likely to be an issue. On the downside, you may not be able to negotiate the same exit value for your business as you might from a competitor desperate to get a strategic advantage or an international company applying a higher multiple.

Related: ‘Business As Usual’ Could Ruin You

5. Management buy-in (MBI) teams

MBI teams are similar to the above, although they will generally have specific experience in your industry and the support of either a VC or private equity (or occasionally private backer) rather than their own cash. Their valuations are likely to be similar to the high net worth buyer.

6. Management buy-out (MBO) teams

Another favoured candidate in any sale are the company’s management. Although unlikely to offer the best price for your business, the owner is often very keen to give management the option to buy the business they have been working in for a number of years.

If this route is considered, the owner will probably need to provide some assistance to management to get an MBO done, either by guiding them to a private equity firm that can provide some finance (and package the remainder from debt or other mezzanine or equity providers), or by providing vendor finance to make up any shortfall (that is, leaving some of the consideration in the business to be paid out when cash flows allow).

7. Companies looking to do a roll-up (with PE backing)

Individuals or companies looking to do a roll-up are not common, and probably will only be introduced to you through an M&A advisor.

A roll-up is where an individual or company attempts to buy a number of similar or complementary businesses in an industry, and then combine them to extract operating synergies, usually ahead of a listing at a higher multiple.

Prices here can be quite favourable, especially where the industry exhibits a good listed multiple, but these transactions can come with the added complications of the vendor being part of a larger group prior to ultimate exit.

Related: 7 Flaws In Your Business Plan You Need to Fix

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8. Companies forming related conglomerates

Similar to a roll-up are companies looking to buy more loosely related businesses — often with vertical integration as one of the aims. Such buyers are generally listed companies looking to achieve arbitrage between the private multiple they can offer, and the listed multiple that will then apply to the target’s profits.

Synergies between operations can also extract additional profits to which the listed multiple can be applied. Valuation can be as good as in a roll-up, and there is the advantage of some of the consideration being available in listed shares with growth potential.

9. Private equity firms (not always 100%)

Private equity firms are always in the market to buy profitable, established private companies — often with the promise of bringing capital and their network to the table to greatly enhance value if an earn-out is part of the transaction.

Whilst up-front consideration may not be as high as from other buyers, if the PE firm is as good as their word, the ultimate consideration that the owner receives can easily meet or exceed his expectations.

10. Other options

Apart from the potential buyers that can be found above, there are other options available, such as:

  1. Take in investment capital, grow the business and then exit at a later date (trade sale or listing)
  2. Sell part of the business that buyers want, and retain the rest.
  3. Go for a listing yourself.

As an owner considering the sale of your business, there are often many more options than you might initially consider — and each with a different set of outcomes as regards value, confidentiality, and structure. It’s important to match the right set of buyers with your aspirations to ensure the best result.

Far too often, buyers approach M&A advisers when they have been approached by a single buyer (often a competitor), and become committed to a deal before considering all other options.

It’s far better to plan for an exit months or years before a sale transaction, and define the non-negotiables required from any deal. This way, you can make sure that you only speak to buyers likely to deliver these non-negotiables, and pro-actively approach them when the time is right.

Needless to say, multiple suitors for your business will undoubtedly lead to a better price than one candidate, but to manage such a process takes considerable skill.

Chris Staines has more than 25 years’ experience in company divestments, partial divestments, joint ventures, mergers and acquisitions. He has sold more than 60 private companies in the $1 million to $100 million range, and has worked across three continents. Chris is currently Head of Corporate Finance at Grant Thornton in Cape Town.

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How to Guides

Does Your Business Really Need Funding?

Strategy, risks, and opportunities.

Carl Wazen

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Businesses need capital to grow, and most small enterprises rely on external funding to meet this requirement. While accessing funding can be challenging for entrepreneurs, taking on the financial commitments of a loan should never be taken lightly. Many small businesses fail because repayment conditions are so onerous they impact cash flow, and business owners end up blacklisted, which dampens their future prospects.

First, ask yourself some hard questions

Before you decide to apply for that loan, cash advance or capital injection, make sure that your business really needs funding. Critically evaluate your business. Consider that you’ll ultimately need to give something back for that funding – an equity stake, or interest payments.

Determine how much the extra funding is worth to you, and what would happen to your business if you couldn’t get it.

Define your goals

The type of funding you need (and how you validate it in the application) is dependent on your short- and long-term goals. If you’re not currently on track to achieving your business objectives, determine what stumbling blocks or pain points are holding you back. Ultimately, you should be certain that the capital will help you achieve your objectives.

Related: Government Funding And Grants For Small Businesses

Evaluate your financial pain points

Next, determine which of the identified obstacles can be overcome with extra money. While most could, a loan may not be the answer. Entrepreneurs often use financing to temporarily plug holes, instead of fixing them. Without addressing the root cause of the issue, the business will continue to struggle, while also dealing with the extra debt.

It is also important to consider the nature of your requirements, and the impact this will have on finances. For instance, using a loan to hire more staff requires upfront funds before additional revenue can be generated. The same applies to sales and marketing initiatives.

Expanding your footprint as part of a strategic plan to grow your business also requires funding, but these are usually long-term loans that take more time to pay back. A thorough evaluation is needed to determine the potential return on investment and compare it to other opportunities.

Evaluate if the strategic benefits will outweigh the mid-term cash flow risks.

Consider your options

Before making any financial commitment, first look for ways to optimise your operation to realise cost efficiencies within the business that can free up working capital to fund the fix.

If you determine that funding will address your pain points, by boosting inventory ahead of a seasonal spike, for example, consider vendor financing or supplier credit options before securing financing from a bank.

If you need to expand the business, look for ways to lower the associated costs. For example, franchising a new location to a competent partner can relieve you of some of the financial burden. A product-based business could perhaps generate extra income by selling via online channels, or through distributors or other retailers instead of a new store.

Related: The DTI Funding Guide You’ve Been Looking For: The What And How

Scenario planning

However, should you choose to proceed, before you sign any loan or credit agreement, make sure you consider all possible scenarios:

  • How long will it take before your investment starts covering the costs of your loan?
  • How will you manage repayments if your forecasted growth doesn’t materialise?
  • How can you pivot to reallocate resources if your plan is not working out as initially intended?

The bottom line

Before you start looking for funding for your business, critically evaluate if your business really needs it. If you decide capital is necessary to reach your goals, and you’re willing to take on the responsibility, carefully consider the type of funding that is best for your particular type of business and your specific needs.

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How to Guides

How Investors Choose Who To Invest In

Why entrepreneurs tend to focus on the wrong things when pitching to investors, and what investors are really evaluating instead.

Allon Raiz

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The hypothesis of my book Lose the Business Plan was that great businesses are not determined by Excel spreadsheets and the all too predictable J-curve, but rather by the entrepreneur or entrepreneurial team and their ability to see opportunity, navigate obstacles and make things happen.

The truth is that entrepreneurs focus on the wrong side of the coin when meeting with an investor. They focus on the deep detail of the business plan and concentrate on justifying assumptions, predicting and overcoming objections, and emphasising market potential. Yet it’s my experience that the real decision on whether or not to invest in a company is more heavily weighted towards the entrepreneur or team rather than the business plan itself.

Once the ‘numbers’ stack (in other words, the business model makes sense) and the risks have been considered and appropriately mitigated, then the real decision-making can begin. The final decision comes down to four important characteristics of the entrepreneur himself or herself.

1. Is she honest?

You may have the best business plan in the world and you may have mitigated every possible risk but, if you are not someone the investor can trust, no deal will be made. I find that entrepreneurs often underestimate the importance of their reputations and, in today’s connected world, it’s so quick and easy to reference someone’s character.

Related: A Comprehensive List Of Angel Investors That Fund South African Start-Ups

Entrepreneurs who think about the short game and make morally questionable decisions for the prospect of quick profits generally find themselves in an ever-diminishing circle of people who will do deals with them. Your reputation is everything and you should guard it at all costs.

2. Does she work hard?

I am still not resolved around the cliché that you should work smart and not hard. (Perhaps I missed the memo or was asleep during the lecture that demonstrated how this is possible.)

In a world that is changing at an astonishing rate, in an economy that is becoming more and more competitive and in a business environment that is becoming ever more complex, it’s hard work to remain relevant and ahead of the curve for any extended period of time. Every quarter sees a new trajectory that needs to be investigated and navigated. In my opinion, this requires not just smart work but hard work, too.

It’s certainly true that investors like to invest in entrepreneurs who will take their investment seriously, who take their businesses seriously, and who are on top of their games.

3. Is she smart?

Smart does not always mean book smart but it definitely means street smart. It means having the ability to read a room, to see an opportunity, to learn new skills quickly and also being able to apply new learning’s to the business.

Investors look for investees who show agility when adapting to feedback from the market, from their competitors, from their staff and more.

4. Is she ambitious?

Investors do not like investing in ‘mom and pop’ operations. They seek the highest return on investment and that comes from businesses that can scale profitably. Scale is always relative to the investor’s perspective and not your own.

An investor with a couple of hundred thousand rand to invest will have very different expectations of the size of business he or she would like to invest in compared to another investor who has tens of millions of dollars. It’s important for the entrepreneur to authentically resonate with the level of ambition of their prospective investor, and be able to express that ambition through a coherent and cogent vision, as well as a plan to achieve that vision.

Remember, no one starts out as the ideal investee. It’s something that is built up over time and requires constant maintenance and curatorship. It’s essential to continually work on your reputation, to ensure that you are up to date with your industry, and to reassess your level of competence in your market. This is the only way to make sure you become and remain an ideal investee to a potential investor.

Read next: The Investor Sourcing Guide

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Company Posts

Are You Struggling To Find Financing For Your SME? Try Alternative Finance

If you don’t qualify for traditional funding or if it isn’t the right fit for your SME why not explore alternative funding? We specialise in alternative financing options by providing in-depth and custom plans for you and your business needs.

Spartan SME Finance

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Alternative Finance is finance beyond the traditional – it is defined by the financiers’ area of specialisation – by what they specialise in, whom they serve, and how they provide their funding. It does not replace traditional finance but rather functions as a complementary and additional form of funding.

Alternative financiers are specialists – they focus on a particular need and on a specific audience. As a result their ‘how’ is customised to deal with their chosen target market and for this targets unique needs. This applies to the funder’s processes and to their level of flexibility around things such as collateral.

An example of this is that a SME may have an existing R1 million overdraft (their traditional finance) secured by R 1.5 million collateral but suddenly they need R5 million for some kind of contract or bridging finance – they need it fast and don’t have that extent of collateral.

The traditional funder cannot provide what they need, their process is too long and their flexibility is too low. An alternative financier providing bridging finance and specialising in SMEs is ideally positioned to fill this gap.

One of the most significant differences between a traditional funder and an alternative financier is in their process. In the case of the alternative financier, they have often chosen to deal exclusively with a particular customer base, for example SMEs. As a result, this funder has both an affinity and contextually relevant empathy in working with SMEs.

Not only do they speak the same language the funder also has an appreciation for the time and material constraints of the SME and has developed their processes to cater to this market. This applies most notably to the turnaround time of the funding need and to the assessment aspect – where flexibility around things such as collateral is vital in making the finance happen for the SME.

A traditional funder is unable to meet the deadline of a bridging finance need, submitted on an urgent basis, where the finance is needed as soon as 2-3 days from time of application. A specialised or alternative funder is able to do exactly this. A traditional funder is also unable to find creative methods in solving the SMEs lack of high-value collateral in applying for finance.

This SME has generally already used their high-value collateral for traditional credit facilities but now needs funding for growth or resolution of a temporary cash flow challenge. An alternative financier is able to look at such an application in a different way, and has most likely already established alternative ways to make this happen for the SME.

Related: 5 Key Questions To Answer For Raising Funding

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