Originally published in American City Business Journals

By Joanne Baginski

When it comes to selling your business, nothing is as important as knowing which buyer is best aligned with what you want. That’s not always the buyer with the deepest pockets.

Entrepreneurs spend years building their businesses and, when it comes time to sell, they naturally want top dollar, whether to retire or simply to cash out. However, sometimes other things matter too, such as preserving a legacy or maintaining the ethos of the company. Sellers hoping to balance those sometimes-competing goals should learn about the various types of potential buyers before going out to market.

Of course, different types of buyers value different things about your company.

Buyers fall into three categories — strategic, financial and internal — and each serves a different goal.

Strategic buyers, or competing companies, often want a company that fits with their own, perhaps because of complementary products or to advance geographic expansion.

Financial buyers, or private-equity investors, want to grow earnings or merge companies to capture savings with the goal of selling for a higher price in three to five years. Some financial buyers take a controlling stake, others take a minority position, but they aggressively pursue their agendas to maximize their investment return.

An internal buyer, often management teams or second-generation family members, works at the company and is someone who may share the owner’s vision and want to build upon it.

Sellers have different goals, too, ranging from maximizing price to legacy – and this is where the matchmaking is critical. For example, a seller that’s retiring and wants the highest sale price should position the business to be most appealing to strategic or financial buyers. Internal buyers are unlikely to pay the highest price, but the culture will be preserved. A seller who has a No. 1 goal of finding someone who will operate the company in the same manner and protect employees may favor a deal with an internal buyer or a non-controlling financial buyer.

Any seller interested in his or her legacy will be unlikely to want to sell to a strategic buyer. However, if the seller wants to cash out but would like to remain at the company for a few more years, a financial buyer would make the most sense.

The considerations are dizzying enough that I’ve developed a chart to help sellers think about their ultimate buyer. You can see that in the image presented here labeled Buyer Types.

Once a seller has defined his or her needs, it becomes easier to make an honest assessment of the strengths and weaknesses of the business through the lens of what that buyer-type values. Then, owners just need to focus their efforts, resources and time on those things that will make the business most attractive to the desired buyer. Sellers that can undertake this process three years before the sale will have the best chance to create a meaningful narrative, backed by years of results.

Looking at the chart presented here labeled Value Drivers, a seller can identify the areas they need to focus on to attract their ideal buyer.

For example, strategic buyers like to see growing profits and the potential for even more in the future, based on strong product development and technology advances. They also place a premium on such things as market share and brand recognition.

Financial buyers, on the other hand, want free cash flow and growing revenue. They are less concerned about profits since they view themselves as experts in squeezing the maximum from operations. Strategic buyers don’t value the management team as much (since their team will most likely assume day-to-day operations) while financial buyers favor a strong team that can execute on their vision.

Internal buyers want to buy a company with generally strong financials and a solid balance sheet, a good corporate culture and a diverse product line.

With all of this in mind, sellers should make a list of three to seven things that they will focus on improving to attract bids from the desired type of buyer that best meets their goals. For example, a seller seeking a financial buyer might decide to focus on improving profitability, defining a growth plan, and building out the management team. A seller that wants to attract a strategic buyer should work on enhancing the firm’s technology advantages while boosting market share and improving brand-name recognition.

All this can take a toll, distracting management from running operations as efficiently as before. Recognizing that, owners should make sure to hire a team of professionals to lead the sale process.

In the end, closing the right deal involves two parties getting what they want most from the process. They say beauty is in the eye of the beholder, and that’s true when it comes to selling a business, too.

Joanne Baginski has almost 25 years of public and private accounting experience and leads the transaction advisory services area at EKS&H. She has been involved in more than 200 transactions, working on both the buy and sell sides of deals, and her expertise also includes business finance, financial planning and analysis, and capital financing.