Selling a business to a buyer from another sector

Small and medium-sized businesses are becoming more likely to be sold to buyers from outside their sector, according to new statistics from corporate financial advice firm, Ford Campbell. In light of this, business owners should ensure they are open to this option when looking to exit.

This advice comes at a time when organic growth can be difficult to achieve. Buyers are looking into purchasing other firms that may be able to offer them a route to diversification, explained Ford Campbell’s head of business and buyer intelligence, Laura Jordan. She explained, “Organic growth is an unrealistic expectation for many companies. Cash-rich trade buyers are looking to achieve growth through diversification by making acquisitions of businesses from different industries or of ones that provide complementary services or product offerings.”

These claims are based on data analysis performed by Ford Campbell that found over 50 per cent of sales, made in the first half of 2011 and worth between £5 million and £10 million, were to buyers from outside the seller’s sector. The total number sold was low, however, with just 49 deals completed within that price category in that period, but 25 of these sales were to buyers from another industry.

These statistics should be a wake-up call to sellers who have been positioning themselves for a sale to a firm from within their sector. Foreign firms are also major buyers within the £5 million to £10 million price-band, according to the Ford Campbell findings. In fact a third of the business sales made in the first half of the year were to foreign firms.

Ms Jordan explained, “UK companies continue to present great value for foreign buyers that are looking to shore up supply chains or expand.”

What’s in it for sellers?
There are several advantages in selling to buyers from other sectors – not least the fact that they are often willing to pay a premium. Such trade buyers have decided that a certain sector is where the money is to be made and will sometimes pay over the odds to move into that industry. On top of this, buying an existing business offers the advantage of gaining the expertise within this new industry that could take buyers years to accumulate if starting afresh. This is worth more to them than it is to buyers from within the sector – therefore, they are likely to offer more.

These ‘horizontal’ trade acquirers are looking for certain reassurances when hunting out a potential business for sale, however, and it’s up to the buyer to provide these assurances. Ford Campbell explained that the following checklist should be adhered to make sure businesses for sale attract the highest paying buyers from other industries:

• Demonstrate the security of the supply chain
A horizontal buyer will want to buy from existing suppliers under the same terms and prices currently arranged. Being able to demonstrate that these terms are secure and that the new owner will benefit from the bulk buying, goodwill and relationships that have already been formed will lure potential buyers in.

• Demonstrate the security of the customer base
Another reason a buyer from another sector may be interested in buying horizontally is the advantage of having an established customer base. Contractual relationships with customers will help to assure buyers that the revenue currently being earned is stable. Any buyers looking to make the most of cross-selling advantages will also be eager to see the contracts currently held with customers.

• Demonstrate a good understanding of the sector
This point refers to the advantages the seller will enjoy if they understand the opportunities available within their sector and are able to communicate these to buyers from other industries. It is vital that the seller is able to illustrate their expertise within the sector and the expertise of any employees. This is what brings value to a business from the perspective of someone looking to move into a new industry in order to grow.

• Demonstrating the value created for the buyer through the purchase
The ability to convey the advantages - such as the reduction of overheads, increased synergies and cross-selling opportunities – will contribute hugely to the likelihood of a purchaser buying a business from another sector. Acquirers who can clearly see the financial value in the deal will pay more for a firm and any spare capacity a seller can demonstrate that could add to the buyer’s profitability, will also help to sell the firm.

Vertical integrations
Some business owners looking to buy up firms from other sectors will be looking for businesses that offer products and services that complement their own. They may also be looking to purchase suppliers or manufacturers – i.e. businesses that are in different stages of the production process.

A recent example is supermarket giant Morrisons, which completed its purchase of florist Flower World in June, which was already supplying about one-third of the flowers sold by the chain. The move was the latest part of its vertical integration plans, which had also involved the transferral of ownership of online mother and baby products seller Kiddicare earlier on this year.

Revealingly, CEO of Morrisons, Dalton Philips commented at the time to industry publication Retail Gazette: “Morrisons wants to be known as the supermarket that excels at retailing flowers. We believe that we can do this by owning our own flower business, being closer to growers and therefore better able to control quality and value.”
Vertical integrations are another major source of buyers from other sectors, so it’s wise for existing entrepreneurs to consider buyers whose existing products or services would benefit from the integration of a firm involved in a different stage in the production process.

Although strong leadership is essential to make this kind of vertical integration work, firms can gain control over more aspects of their production through this kind of deal. Sellers who can demonstrate how the buyer will benefit in terms of control and influence over factors like delivery times, quality and cost will attract vertical buyers.

Whether targeting buyers looking to break into a new sector, or those searching for complementary businesses to help boost profitability and gain control over their supply chain, sellers can secure well-priced, quick sales from being open to buyers from other sectors. During times when organic growth is tough, those selling a business should focus on the value of their expertise and established position in the industry to lure those who may be dipping their toes into the sector for the first time.

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