In this installment of the “What To Know” Series, we will describe the different buyer types and items to consider within each. There are many nuances to these descriptions. The following content establishes a foundation to build upon.
Buyer Types
Private Equity: A buyer with committed capital from individuals or institutions. This buyer type is mandated to invest in companies that meet its specific criteria. As a result, private equity participates in a large volume of transactions each year. Investors in private equity often specify their committed capital will be returned in approximately 5-7 years. To mitigate buyer risks and align interests with sellers, this buyer type often requires continued ownership by the seller (often as a minority at less than 50% of ownership going forward).
Strategic / Corporate: Operating companies that may or may not have private equity funding. These buyers are driven by the strategic direction of its shareholders and / or board of directors, if not owned by private equity. Due to the size and nature of these companies, they often do not allow sellers to retain any ownership unless owned by private equity.
Independent Sponsors: Traditionally run by individuals with private equity or prior business ownership experience. Funding is provided in a ‘pass-the-hat’ fashion (often with known and / or existing relationships). There is little, if any, committed capital. Time to close is often elongated to procure the necessary equity. Investors regularly specify their committed capital is returned in approximately 5-7 years. To mitigate buyer risks and align interests with sellers, this buyer type often requires continued ownership by the seller (often as a minority at less than 50% of ownership going forward).
Family Office: Traditionally run by individuals with private equity or prior business ownership experience. These individuals recommend investments to wealthy families. This buyer type is traditionally not bound by an expected exit time horizon. Time to close is often elongated to procure the necessary equity. Depending on the desires of the family office, they may mitigate buyer risks and align interests with sellers. This buyer type often requires continued ownership by the seller (often as a minority at less than 50% of ownership going forward).
Search Funds: Lead by a “Searcher” who intends to assume an operational role via the funding support of high-net-worth individuals and / or private equity groups. There is no committed capital. Time to close is often elongated to procure the necessary equity. Investors often specify their capital is returned in approximately 5-7 years. Multiple investors can create a complex negotiating and closing process. To mitigate buyer risks and align interests with sellers, this buyer type often requires continued ownership by the seller (often as a minority at less than 50% of ownership going forward). Given the 1-time in nature these transactions are for the “Searcher”, inexperience in deal making can become challenging to work with.
Individual Buyers: This buyer type traditionally creates entrepreneurship through acquisition where they assume an operational role post-close. Given the 1-time in nature these transactions are for the “Searcher”, inexperience in deal making can become challenging to work with. If other investors are required, the time to close is often extended to procure the necessary equity. Investors often specify their committed capital is returned in approximately 5-7 years. To mitigate buyer risks and align interests with sellers, this buyer type often requires continued ownership by the seller (often as a minority at less than 50% of ownership going forward).
For many sellers, some or all of these buyer types may be appropriate depending on the goals and objectives. Each has its own distinctive advantages and disadvantages. It is important to be aware of the different types of buyers and understand the areas that are more attractive for them. Our deep understanding of these buyer types allows us to negotiate the best price and terms to meet the needs of our client.
For more information, contact Ely Friedman, Director of M&A with VonLehman CPA & Advisory Firm at efriedman@vlcpa.com.
