We continue to post chapters from our upcoming ebook guide, How to Sell an Online Business, to help business owners prepare for a sale. In this fourth chapter, we profile different types of prospective business buyers for your company.
4. Going to Market
The universe of potential buyers for online businesses is wide and diverse – from individual entrepreneurs, search funds, and family offices, to strategic acquirers, private equity firms, and aggregators. There are pros and cons to each and there may be differences that will impact valuation, deal structure, and the direction of the business post-transaction. Following is some detail to help you identify which buyer types might be most appropriate.
For smaller digital businesses, individual entrepreneurs might well be your best target buyers. The appeal of business ownership compels many entrepreneurial individuals to take on the risk of a business purchase. On the plus side, an individual buyer can share your passion for the business and pour their heart and soul into it. A buyer with the right motivation and experience might take your business to the next level, bringing your employees along for the ride. That said, individual buyers are often investing personal savings as equity into a deal, and may be more likely to seek bank or seller financing as part of its structure. Sellers should confirm early on the availability and source of capital for the down-payment, and assess the viability of bank or seller financing. Additionally, with personal savings on the line, emotions can boil up and make negotiations and diligence more challenging with individuals than with institutional buyers. In general, individual entrepreneurs have less financial flexibility than institutional, particularly strategic/industry buyers.
The search fund model is an interesting “hybrid” approach to business acquisition. “Searcher funders” are individual entrepreneurs, often recent MBA graduates, who undergo a dedicated, often two year search to acquire a single business which they plan to run. With a number of institutional investors backing search funders, many are focused on larger businesses than individual entrepreneurs, often with a minimum of $1 million or $2 million EBITDA. Search funders can offer the passion, continuity, and immediate leadership of individual entrepreneurs, with perhaps better access to capital, more financial flexibility, and the support of a “bench” of experienced investors. That said, search funds typically do not have committed capital; their investors generally back them on a deal-by-deal basis, so there is some funding risk. Additionally, some owners may find it challenging to hand over the reins to a newly minted MBA.
A family office is a private investment firm established to manage a family’s wealth. While their role can vary significantly, many of these firms invest in and acquire privately held companies. Investment criteria can vary greatly based on the goals of the family, though many have a lower size threshold than private equity groups and other institutional investors. Additionally, family offices have flexibility on the hold time of their investments and in some cases will own and build companies indefinitely.
Buyers that acquire companies to complement another entity are known as strategic buyers. Rather than purchasing a company solely based on its financial performance, these buyers are interested in leveraging the value inherent in the business – whether the customer base, traffic, IP, domain, or otherwise. Because strategic buyers see value beyond financial performance, they may have the flexibility to pay more for a business than a “financial” buyer. That said, extracting the value of an acquired business may mean rolling the company into another entity, which can impact the employee base, brand, and other elements of the business.
Private Equity Firms
PE firms raise private capital from sources that might include pension funds, endowments, and high net worth individuals to invest in or acquire companies. Private Equity firms generally build a portfolio of businesses which they support financially and through board oversight, with the idea of growing the businesses and selling them for a profit. The fund size of private equity groups can vary widely, from millions to billions of dollars. Those groups with smaller funds might acquire or invest in smaller, closely held businesses, either as a standalone investment, or as an “add on” to an existing business in the portfolio. PE firms are generally sophisticated buyers which can make the process easier for a seller. That said, their goal is to grow and sell businesses, often with a 2-5 year time horizon, which is not appealing to some sellers.
A number of Aggregators have emerged in recent years, focused on acquiring e-commerce, Amazon FBA, Shopify, and other online businesses. In general, the strategy is to create a portfolio of small businesses around similar market segments or target customers. Aggregators, which may possess expertise in a particular space and/or benefit from the economies of shared resources, seek to build value exponentially by adding brands to their portfolio. Aggregators range from individual entrepreneurs with a few holdings, to companies like Thrasio, which raised over $1 billion in 2018 and owns over 200 brands. Aggregators can be a good alternative to individual entrepreneurs for owners of smaller e-commerce businesses.
Depending on the size and profile of your business, some of these categories of buyers will be more appropriate than others. In developing your marketing strategy, think through the mostly likely buyers, and the types of buyers to whom you would feel most comfortable selling.
Quick Answer takeaways:
- Know who your ideal buyer is.
- Ask questions that reveal their level of interest.
- Confirm they have the funds to close the deal.
- Make sure your marketing outreach is focused on your ideal buyer.
Learn how to engage with business buyers in the next chapter of the Seller's Guide.