How to sell an automation or system integration business
It comes as a surprise to many people, but every privately owned business has different values, depending on who the buyer of the business might be. This is because different types of buyers are motivated differently and perceive risk differently.
Selling a business requires identifying potential buyers and how those buyers perceive risk and opportunity resulting in realizing higher value for the business.
For example, about 5 years ago John bought out his partner in a medium-sized system integration business specializing in the water and wastewater industries. While the sale came sooner than they had planned due to an unexpected illness of John’s long-time business partner, they followed the terms of their buy/sell agreement and had a fairly smooth transition of ownership. John took 100% control based on their mutual desire to keep the business’s equity with the original owners as they navigated a period of rapid growth.
As John looks ahead towards retirement in another 5-10 years, he feels he’s in a good position to sell the business based on current success. He knows he will consider a variety of options for buyers; however, he doesn’t have any ideas who those might be other than an employee of the business who has shown some level of interest and potential. However, he is unsure he wants to place his retirement bet on just one person who has no binding obligation to even stay as an employee, let alone take on ownership. After all, this is John’s life work, and he knows it will be a major decision how he leaves behind the business that carries his name.
While John’s retirement may be at least 5 years away, it’s never too early to think about an exit strategy. A situation can change quickly based on the market, health, or other factors. So now is a good time to start thinking about possible buyers based on objectives. For example, might John’s children be interested in owning the company and keeping it in the family? Does he have an employee or group of employees that are loyal and share in his vision for the business? Or is he interested in selling to an outside buyer, such as a competitor, to maximize the selling price?
The chart illustrates types of buyers and the relative values that each would pay for a business. Amounts vary because each group is motivated differently and perceives risk differently. The buyer types listed in the chart range from those who would likely offer the lowest enterprise value (lowest sales price) such as the undiversified passive investors (level 1) up to the highest enterprise value, the strategically positioned buyer (level 9).
The passive investor doesn’t work in the business and doesn’t necessarily understand the industry but is looking for a better return than can be gained in alternative investments. This is a very different buyer than the strategically positioned buyer, who has interest based on what it would do when combined with the buyer’s existing business portfolio. This buyer understands the industry and likely has a business portfolio that includes businesses similar to the target. In other words, the buyer who has a strategic reason for purchasing the business will likely be capable of generating higher cash flows and managing the inherent risks of the business and is therefore willing to pay a higher price than the passive investor.
While initially it may be a surprise to hear that every privately owned business has a number of different values, reviewing the chart can provide understanding about why value is impacted depending on the type of buyer.
Five ways to identify buyers
Many business owners have not thought much about who the buyer of the business might be; here are a few tips to get started. (See summary table.)
1. Check your buy/sell agreement. If you have a partner in your business, are there any stated provisions about what types of buyers you can/cannot sell to within your agreement?
2. Identify your exit objectives. Do you want to/need to keep your business within your family or certain group of employees? Or no matter what happens, are you just looking for ways to maximize sales price? While they may change over time, put exit plan goals in writing.
3. What are your potential buyer types? Based on the chart and your objectives, what two or three buyer types could you see as the best fit to sell the business to when the time comes?
4. Keep a running list. Who are your top five contacts you’d call if you needed to sell today? While your list is sure to evolve over the years, record ideas about possible buyers for the business as you read industry articles, attend tradeshows, attend networking events, etc. If the time comes to sell the business sooner than you think, you’ll have the comfort of knowing you’ve positioned yourself for success by keeping a long list of prospective buyers.
5. Make yourself known. Ensure potential buyers know about your business even before thoughts of a sale begin. Write or speak about some of the successes the business has had in your industry publications or at your industry’s conferences.
Many smart business leaders talk about the concept of "begin with the end in mind." Thinking ahead to identify a buyer of the business might fall into that school of thought. When you know where you are going in the end, it’s going to help you prepare to successfully get there.
If you can anticipate potential buyers and identify what their expectations and concerns will be in plenty of time before the potential sale, then you are well-positioned to make changes that can maximize the value of the business when the time does come to sell.
Future articles in this nine-part series will discuss how to increase the value of a business.
- Keep a list of potential buyers for a business.
- Update the list as you go.
- Increasing visibility can help identify additional buyers.
Starting with the end in mind includes considering potential business buyers.