Buying a company: Know who you’re buying from

When purchasing a business, it is not only important to consider what business you are buying, it is also crucial to understand who you are buying the business from. There are several types of business owners and as the buyer, you need to be mindful of the company that will best fit your circumstances and lifestyle or at least understand the probable implications of purchasing from a certain proprietor.

Below are four of the more common types of owners you may encounter when looking to buy an existing business.

Private equity owners

Private equity owners are professional buyers and sellers of assets so tend to be unattached and unemotional in terms of the business itself, focusing exclusively on the price and speed of sale. They have the reputation of being tough negotiators and can be inflexible on warranties but for the buyer there is the advantage in that private equity owners tend to act relatively quickly to get deals off their books

Businesses of private equity owners are generally backed by venture capitalists, individuals or investment firms who make venture investments, a type of private equity capital provided to early-stage, high potential, fast growing companies. Venture capitalists focus on return on investment and are often involved with companies in the high-tech sector, such as biotechnology. For speed and ease, venture capitalists tend to prefer to sell their investments rather than generate a stock exchange offering or flotation.

One of the most important things to consider when acquiring a venture capital-backed business is the relationship that has been built up with the management of the company - often the managers may have fallen out with their equity backers and some relationship building may be required.

Large corporation selling off a subsidiary

A large corporation selling off a subsidiary is another common type of seller you may encounter. These owners are generally large corporate groups which have made the decision to dispose of one or more of their divisions. Just because the owner is a big corporation doesn’t mean you leave your caution behind. It is still necessary to properly understand the reason for their decision to sell.

You can quickly make a few preliminary enquiries and see what you find. Perhaps the board is under pressure to make disposals in order to repay due debts or increase company focus, so sections of the business which have been deemed non-core are being put up for sale. If that is the case, the business may be sold in a healthy state, however timing is often of the essence for the owner. As the buyer, you can use this to your advantage as the owner’s priority may be to sell quickly rather than achieve the optimum price. So if you a buyer in the know, you could definitely achieve a purchase price at a value somewhat less than the market valuation.

Another situation that may work to your advantage (if you’ve done your research) is that the public company's shares may be falling in price, and the corporation is under pressure to dispose of the loss-making business swiftly, without waiting for the share price to recover. For a careful purchaser, there are good deals to be had in such a situation.

On the other end of the spectrum of large corporate owners is auction sales. These may take place for a company sale in an effort to get better prices. Often, the owners are looking for straightforward cash deals, so if you’re looking to buy at an auction, make sure you’re prepared and have the funds raised and resources at hand.

It is also worth noting that it can sometimes be difficult to get hold of the individual who has the decision-making power in such a large corporation, so being ready when the divestment is to go ahead is crucial. In general, dealing with large organisations can require patience and quick access to resources, but the rewards may justify the trouble.

Privately owned company

Yet another common type of owner in the business sale landscape is the privately owned company. Inevitably, owner-founders are often emotionally involved with their business. If you are looking to buy a company like this, you need to be ready to win over the current owner and reassure them that their company will be in safe hands. This is in stark contrast to corporate owners, private equity owners and administrators who only care that the buyer has the money for the purchase.

Unlike the other three types of owners, a private seller may not always have an accurate picture of the value of their business, so good negotiating skills and research on your part as the buyer are especially necessary for these acquisitions. It can even happen that second or third generation family owners undervalue the potential of their business and sell what can prove to be a business gem for a much lower price. Don’t forget - information is key!

Firms in administration

With the rise of businesses falling into administration, buying a firm in administration is more common than you think. Don’t simply dismiss a business because it’s in trouble, there may be a significant opportunity here worth exploring. What you do however need to do is first assess a few things.

An important question to start off with is why did the business fail – is the company strapped for cash or is there a bigger problem with generating revenue. The answers to this question can be quickly followed up with whether the business still remains a good acquisition option for you as the buyer. In some cases, companies in administration can provide the best bargain of all, provided due care is exercised and the buyer is in a position to act quickly.

Knowing the owner of the business you are buying is a vital tool in conducting effective negotiations and getting the best price. Don’t underestimate the importance of the owner - know who you’re buying from.

Looking for more tips on buying a business? Check out our other articles on:
Why are some acquisition deals abandoned?
Buying a business in debt
The top 10 questions to ask a seller before buying a business.

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