Planning for Closely Held Business Owners - 10 Types of Buyers

Question 1

Difference in valuation and sale structure based on third party?

Question 2

Difference in valuation and sale structure based on employee?

Question 3

Difference in valuation and sale structure based on family members?

Question 4

Who are the potential buyers of a closely held business?

Answer 4

strategic buyers, financial buyers, employee buyers, lifestyle buyers, industry buyers, and family members

Question 5

What is the Market Approach?

Answer 5

This works best in real estate because there are so few parameters to consider, and they are fairly consistent by region and price range. Businesses, on the other hand, have an almost infinite number of moving parts, so comparable sales have to be used in conjunction with other valuation methods.

Question 6

Strategic Buyers

Answer 6

-a competitor in the same industry or a company that operates in an adjacent or related field
-look to acquire an established business to increase market share, diversify their product or service offering, or expand into a new geography

Question 7

Financial Buyers

Answer 7

-seek to acquire or make investments in companies principally to generate an economic return on the investment by driving growth and operational efficiency.

Question 8

Employee Buyers

Answer 8

-Employee Stock Ownership Plan (ESOP) is a qualified retirement plan that offers business owners an exit path while also creating wealth for the company’s employees.
-Although the transaction requires careful planning and analysis, selling a company to an ESOP can offer an incredibly impactful exit option for owners looking to maximize cash at closing while maintaining stability for their employees and preserving the owner’s legacy.

Question 9

Lifestyle Buyers

Answer 9

-are looking for an income, the ability to build equity, and the ability to service their debt from future cash flows.
-There is a saying about this buyer type: “they will buy the future, but they will only pay for the past”
-the valuation method of choice for this buyer type is the multiple of seller discretionary earnings.
-For larger companies still within this buyer type segment, they may use the multiple of EBITDA method.
-difference between the two is that seller discretionary earnings includes the owner’s normalized salary and multiple of EBITDA does not.

Question 11

Industry Buyer

Answer 11

-somebody in your niche that you know and considers your company inferior to his/her company.
- typically a bottom feeder and is trolling for a company to buy on the cheap for certain assets that your company may have.
-If they use a valuation method, it will be the asset approach — probably a book value method.