Type of buyer
Does the thought of exiting your business give you the chills? It is a challenging process. The timeline to exit depends on the type of buyer and three key factors three types of buyers: strategic buyers, financial buyers, and individual buyers.
Strategic buyers will pay a premium for acquisitions. They may be current competitors, customers, or large
companies looking for strategic diversification. These buyers usually act quickly and close on acquisitions within 12 to 18 months. An example of a strategic buyout is the sale of Kinko’s to FedEx.
Financial buyers include private equity groups, venture capitalists, or hedge fund companies. These buyers may pay a premium for a company if they are convinced that the company has growth potential within a five-to-seven-year period with the ultimate goal of selling the target company. Financial buyers usually look for a target that needs management changes or capital infusion to increase the value significantly. A recent financial buyer deal is the sale of Harrah’s Entertainment to a private hedge fund.
The individual buyer is looking for a company that fits the buyer’s industry experience. They focus on small businesses with sales under $5 million. In general, exit time can take 12 months to five years with payment
Seller exit lead times also depend on three key factors: the size of their business, its industry, and its ownership structure.
For companies with revenues of $5 million to $100 million the exit time needed to complete the sale may run from 18 to 36 months. For small companies, lead times depend on an internal or outside succession.
For internal individual buyers such as employees or family members, the timeline can be three to five years due to training and financing issues.
Most employee-based successors need as much as five years to payoff the owner. They usually do not have the funds or credit strength to pay off the owner immediately.
A business’s industry is also a factor. Some industries such as professional service firms legal, engineering, architectural, or accounting firms can take two to 10 years for professional and management training of successors and to pay off the owner. If the professional service firm is sold to outside buyers, the timeline can be shorter depending on the resources of the buyer. In manufacturing, distribution, and technology industries, exit timelines range from 12 to 24 months.
A company’s ownership structure will drive the exit time frame as well. A structure with more than three owners is more complicated; companies with multiple owners have personality issues with involved negotiations and possible disputes that can delay the process; each owner’s perception of risk and return on investment can require extensive negotiation time.
Scott T. Wait CPA, is a managing director of The McLean Group LLC, a merger and acquisitions firm. He can be reached at 825-7637, swait@mcleanllc or http://www.mcleanllc.com.
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