Who is buying businesses?
In our last two articles, we have looked at the most common reasons to sell a business and the best time to retire and exit from a business. This month we look at the other side: buyers. Who is buying businesses?
The type of buyer will vary according the size and nature of the business, however they generally fit into one of the four categories below:
1) High net worth investors with industry experience
These buyers are often business owners in their 50-60’s who have recently sold their old business for substantial amounts. Left with time on their hands they are typically not people who want to retire early; they are therefore looking for a smaller business in the industry they know, to which they can bring their experience, contacts and financial backing.
We typically see this scenario with the precision engineering sector. Such buyers are looking for engineering companies turning over £1m to £4m. Often they are looking to acquire 3-4 companies in order to build a group with turnover of £10m to £15m and the associated higher multiples on exit.
2) Trade / Strategic buyers
These buyers are existing companies in similar or aligned industries looking to expand and/or diversify. Whilst direct competitors may be interested in acquiring their competition’s client base, they do not tend to offer the highest value. The best trade buyers are those who have a strategic objective, for example to extend the coverage of their service into another geographic region, or to add a complimentary service to their existing business and open up the opportunity to cross sell to the merged client base.
Most of the trade sales we have completed have been for professional B2B service sector businesses, such as IT support companies, marketing agencies and accountancy practices. With these types of businesses, buyers need to have specific industry knowledge and capability.
3) Private equity with management buy-in
These buyers are usually looking for businesses with annual revenues of over £5m and net profit over £1m. There is a growing number of small private equity firms looking at a variety of industry sectors and the smaller end of the market. They look particularly at the growth potential and obviously the return on their investment and often have a pool of management buy-in (MBI) candidates with the relevant industry knowledge to take charge of the business post acquisition.
We are often approached by such niche private equity firms who focus on buying businesses in the engineering and B2B service sectors we specialise in, as well as MBI candidates themselves who are already backed by an appropriate private equity firm.
4) Entrepreneurs with spare cash of £200k to £1m
These buyers fall again into two categories: A) those who have built up their cash reserves during a successful career, for example in the city or a large corporation. Having left the corporate world they are looking for something more interesting to invest in and manage than the alternative of property or leaving the cash in the bank. B) Serial entrepreneurs who build businesses over a period of 3-5 years with the purpose of selling and starting again on a new venture. Either way, these buyers tend to be looking for small, sub £1m turnover, highly niche businesses.