What buyers look for when buying a small business [Transcript]
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[Plan Your Future Today]
[Kimberly Deas, BCI, Business Transfer Specialist]
[Murphy Business & Financial Services]
There are different types of buyers for different types of businesses. In fact, we find typically that there are three types of buyers. There’s your financial buyer, your strategic buyer, and your VISA buyer. We’re going to go over each of these in a little bit more depth. What we first want to start with is understanding there are some characteristics that are common to all buyers.
To begin with, buyers are mostly risk-adverse, which means that when they look to buy a business, they’re going to want to minimize the risk of that business. They want businesses that have low risk, so they’re going to avoid businesses, often, that are being sued or businesses that don’t have clean records or businesses that perhaps have inherent risk within the industry. So that’s something that all buyers look for.
The second thing that they truly look for is dependable financials. Oftentimes, a buyer, whether they’re a strategic buyer or a financial buyer, even a VISA buyer, they want to know that the financials of the business are reliable. They want to know that they can depend on the information to be accurate.
And lastly, there has to be some value to the buyer. Now, the value for a financial buyer and a strategic buyer and a VISA buyer are very different, but the value over all, there has to be a value to the buyer for them to want to purchase the business.
So let’s start with looking at the differences, and let’s start with the financial buyer. A financial buyer is predominantly interested in the financials. What they are truly buying is the profit of the business. They are exchanging a one lump sum of money for a monthly or yearly sum of money. So in order for them to validate the value of the business, they’re going to be looking for clean books and records. So that means as a seller or as an owner of a business, if you haven’t been reporting all of your income on your tax returns and on your P&Ls, this is not going to show very well for your financial buyer.
On top of that, sellers often leave after the acquisition of this kind of business. They don’t stick around very long. The buyer wants to come in and run the business. They’re an owner/operator, so they don’t expect the seller to stick around for maybe anything longer than two, sometimes four weeks, or a little bit longer, depending on the complexity of the business. But oftentimes, that buyer is eager to get in there, eager to start running the business, and are looking forward to owning and operating your business.
Now, the way that these buyers value businesses is often a multiple of the net profit. Because the profit is what’s most important to them, they are very, very interested in that, and then they apply a multiple. That multiple can range anywhere from typically one to three times net profit. It could be four to six times EBITDA, or even six to 10 times EBITDA, depending on the size of the business. Most businesses under a million dollars of EBITDA or net profit are sold to this kind of buyer.
Our next type of buyer that we’re going to look at is a strategic buyer, and a strategic buyer is often looking to buy a unique component of the business. This could be something that typically they’re not going to be able to buy in the marketplace. So it might be specific clients. It might be a technology. It might be intellectual property. It’s something that your business has that they can’t readily go get in the marketplace, and these are what strategic buyers look for. This is the value that they’re looking for.
Oftentimes, for them, net profit isn’t as critical, and this is where sometimes we see, especially in the technology arena, we’ll see companies paying what can sometimes look like crazy multiples, because this business has something that they can’t readily get anywhere else. So they will pay extra for this. Now, this type of buyer often will ask the seller to stay with the business, to continue to operate the business, because that seller has something very specific that nobody else might have. It might be a specific technology. It might be intellectual property. Something about that seller and that business is unique.
Now, the way these are often valued is sometimes it’s a multiple of net profit, or sometimes it’s just based on a method of what it’s worth to the buyer. These businesses, when strategic buyers place valuations, it’s very specific to that type of business that’s buying it. These are often what we consider mergers or acquisitions. So it’s companies buying businesses. It’s not usually individuals. These are usually companies over a million dollars of EBITDA, and again, it’s because they have something very special. So again, strategic buyers are really looking for that special factor, and not all businesses are going to qualify to be purchased by a strategic buyer.
Our last type of buyer we’re going to look at is the VISA buyer, and VISA buyers are really looking, depending on their VISA. Could be an E2 VISA or it could be E5 VISA or an L1. There’s multiple different types of VISAs, but the business has to be large enough to qualify for the VISA. And what I mean by this is each VISA has its own requirement. So one VISA might be $100,000 minimum investment. One might be a million-dollar minimum investment. Depends on the type of VISA that the buyer is looking to obtain.
For these businesses, the financials are going to be important, and the profits are going to be important, but they’re not going to be as critical as they are to a financial buyer. Sometimes when they’re looking to buy businesses, they will purchase businesses that maybe are not as secure or not as stable as other businesses. We see this a lot happening in cities like Miami or Tampa or Orlando, where businesses that normally would not be sellable, a VISA buyer will purchase, because it has something specifically that that VISA buyer wants. It might be a technology that they know. It might be a location that they want. It may be simply that it qualifies for the VISA, because not all businesses will qualify for a VISA.
So some of the qualifications are going to require that they have profitable tax returns or that the new owner, the buyer, can have a business plan to show how it can be profitable. Typically, with these, the seller is going to leave right after the sale. The new owner is going to be an owner/operator, and they’re going to take over operations very, very soon. These are often valued on a multiple of net profit, again, or another method based on the value to the buyer. Sometimes we see that VISA buyers will pay a little bit more than our traditional financial buyers, because only certain businesses will qualify for their criteria. And typically, these buyers are looking at businesses under a million dollars of EBITDA, and EBITDA is Earnings Before Interest, Tax, Depreciation, and Amortization.
So as we look at the different types of buyers, we really have three different types of buyers we looked at today. We have the financial buyer, who’s really looking at buying a job, buying a financial cash return. We have the strategic buyer, who’s looking to buy something very special that he can’t typically buy in the marketplace or get in the marketplace. And the third type of buyer is a VISA buyer, and they’re really looking for that purchasing of a VISA and a business that will qualify them to be able to live in this country and to be able to get their residency.
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