Why Do Buyers Buy Businesses?
Like many questions we are asked, part of the answer to, “why do buyers buy businesses?” is “it depends”. In this case It depends on the what type of buyer it is.
An “economic buyer” is buying income. They are looking for how much Income (SDE: seller’s discretionary earnings) the business has generated in the past and is likely to generate in the future.
A “Strategic Buyer” has a broader agenda. They are looking to grow their existing business through a complementary, and synergistic acquisition.
A “Financial Buyer” (private equity firm) is looking for a significant return on their investment.
In almost all cases the “Buyer” is buying the future. But lacking a crystal ball they will use past performance to predict future performance.
Generally, “A buyer will buy your business not for what it has been, but for what it can be”
Other reasons, particularly for strategic buyers are:
- Acquire new products / technology
- Achieve growth more rapidly
- Acquire established presence in a new market
- Avoid risks of start-ups or expansion
- Acquire talent, management or staff
- Acquire undervalued facilities
Although “Buyers” are buying the future, they generally will not pay for “potential”. They will only PAY for current and past performance of the seller’s business.
Other reasons/needs for buyers to buy businesses
- Provable books and records (have your financial house in order)
- Reasonable price (what is the multiple of the SDE?)
- Leverage and terms: have an open mind in terms creative structures that can produce “win-win” outcomes such as, earn outs, seller financing, consulting agreements etc.
- Living wage: can I support my family with this business?
- A fair valuation of FF&E (Furniture, fixtures & equipment at current Fair Market Value, not overstated)
- Appearance: business needs “curb appeal” too
- Lease (reasonable term and cost)
- Training (1–6 months, negotiable)
- Covenant not to compete: usually for a period & distance (negotiable)
- Good reason for sale: for age appropriate individuals, “Retirement” is the best reason. Others: relocation, health issues, unable to take business to the next level, etc.